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THE 
DISTRIBUTION   OF  WEALTH 


^^^ 


THE 


DISTRIBUTION  OF  WEALTH 


BY 
THOMAS   NIXON   CARVER 

PROFESSOR  OF  POLITICAL  ECONOMY  IN 
HARVARD   UNIVERSITY 


OF   THE 

UNIVERSITY 

OF 

^UFORNV^ 


THE   MACMILLAN   COMPANY 

LONDON:  MACMILLAN  &  CO..  Ltd. 

1908 

All  rights  reserved 


^1\ 


GENERAL 


Copyright,  1904, 
By  the  MACMILLAN  COMPANY. 


Set  up  and  electrotyped.      Published  October,  1904,     Reprinted 
July,  1908. 


NortDootr  ipress 

J.  8.  Onshlng  Co.  —  Berwick  &  Smith  Co. 

Norwood,  Mass.,  U.S.A. 


PREFACE 

Ten  years  ago,  when  the  author  began  the  teach- 
ing of  political  economy,  the  economic  world  was  still 
engaged  in  a  lively  discussion  of  certain  problems  in 
distribution.  This  discussion  had  been  precipitated 
a  few  years  earlier  by  the  writings  of  such  men  as 
Francis  A.  Walker  and  J.  B.  Clark  in  America, 
W.  S.  Jevons  and  Alfred  Marshall  in  England,  and 
a  group  of  Austrian  economists,  notable  among  whom 
were  F.  von  Wieser  and  E.  von  Bohm-Bawerk.  The 
author  had  already,  during  his  course  of  university 
study,  taken  an  interest  in  this  discussion,  halving 
contributed  two  articles  to  the  Quarterly,  youmal  of 
Economics^  one  in  October,  1893,  on  "The  Place  of 
Abstinence  in  the  Theory  of  Interest,"  and  the  other 
in  July,  1894,  on  "The  Theory  of  Wages  adjusted  to 
Recent  Theories  of  Value."  The  interest  thus  devel- 
oped has  not  declined,  but  increased  during  the  sub- 
sequent ten  years  of  active  teaching,  first  in  Oberlin 
College  and  afterward  in  Harvard  University,  and 
the  present  volume  is  the  outcome. 

The  author  hopes  that  the  reader  who  takes  up 
this  volume  may  do  so  with  the  understanding  that 


197447 


VI  Preface 

economics  is  a  science  rather  than  a  branch  of  polite 
literature,  and  with  the  expectation  of  putting  as 
much  mental  effort  into  the  reading  of  it  as  he 
would  into  the  reading  of  a  treatise  on  physics, 
chemistry,  or  biology.  The  collateral  reading  at  the 
close  of  each  chapter  is  not  intended  to  be  exhaus- 
tive, but  is  selected  with  a  view  to  the  needs  of  the 
author's  own  classes.  Only  so  many  references  have 
been  selected  as  a  class  could  reasonably  be  required 
to  read,  together  with  the  text,  in  a  half-course, 
meeting  three  hours  a  week  during  a  half-year. 

So  much  has  been  written  in  the  field  of  distri- 
bution that  it  would  be  impossible  for  any  writer 
in  this  field  to  claim  originality  for  all  his  ideas,  and 
equally  impossible  for  him  to  give  full  credit  in 
every  instance  to  all  those  to  whom  he  is  indebted. 
The  present  writer  is  led  to  believe,  however,  that 
there  is  enough  of  originality,  both  in  his  ideas  and 
his  manner  of  presentation,  especially  in  the  chap- 
ters on  Dirryjiishmg  Returns  and  InJtergal^  to  warrant 
the  publication  of  the  book. 

No  one  is  entitled  to  be  heard  on  the  subject  of 
distribution  who  does  not  owe  much  to  such  works 
as  Marshall's  "  Principles  of  Economics,"  Bohm- 
Bawerk's  "  Positive  Theory  of  Capital,"  Taussig's 
"Wages  and  Capital,"  and  Clark's  "Distribution  of 
Wealth."     The  author  hereby  acknowledges  his  in- 


Preface  vii 

debtedness  to  these  writers.  He  has  also  received 
many  suggestions  from  the  series  of  articles  which 
have  appeared  in  the  various  economic  journals  by 
such  writers  as  F.  Y.  Edgeworth,  Simon  N.  Patten, 
S.  M.  Macvane,  Richard  T.  Ely,  Irving  Fisher,  H.  C. 
Emery,  J.  H.  Hollander,  C.  A.  Tuttle,  F.  B.  Haw- 
ley,  W.  G.  L.  Taylor,  and  F.  A.  Fetter.  He  is  also 
under  obligations  to  his  colleague,  Professor  C.  J. 
Bullock,  for  his  valuable  suggestions  and  friendly 
criticism,  and  to  Mrs.  Laura  Grant  Folin  for  assist- 
ance in  revising  the  manuscript  and  reading  the 
proof.  But  the  author  owes  most  of  all  to  his  wife, 
whose  many  helpful  suggestions,  kindly  criticism, 
and  unfailing  sympathy  have  not  only  made  the 
preparation  of  this  book  possible,  but  were  the  in- 
spiration of  the  years  of  study  and  preparation  which 
preceded  it. 

T.  N.  C. 

Cambridge,  Mass., 
September,  1904. 


CONTENTS 

CHAPTER  I 

PAGB 

Value i 

CHAPTER  II 
Diminishing  Returns 53 

CHAPTER  III 
The  Forms  of  Wealth  and  Income    ....    102 

CHAPTER  IV 
Wages 

CHAPTER  V 
Rent 185 

CHAPTER  VI 
Interest 213 

CHAPTER  VII 
Profits 259 

ix 


INTRODUCTION 

Professor  Marshall  has  aptly  defined  economics 
as  the  study  of  man's  actions  in  the  ordinary  business 
of  life.  Since  the  ordinary  business  of  life  consists  in 
getting  a  living,  it  was  easy  to  modify  this  definition 
so  as  to  read,  Economics  is  the  study  of  man's  efforts 
to  get  a  living.  Either  of  these  definitions  would 
imply  that  the  science  is  concerned  more  with  man's 
economic  activities  than  with  the  things  toward  which 
those  activities  are  directed ;  more  with  the  ways  of 
getting  and  using  wealth  than  with  the  nature  and 
forms  of  wealth.  As  a  matter  of  fact,  the  student  of 
economics  cares  only  incidentally  for  a  description 
and  classification  of  the  things  which  constitute 
wealth ;  but  he  wishes  primarily  to  know  the  methods 
by  which  wealth  is  procured  and  utilized.  In  other 
words,  economic  activities,  rather  than  economic 
goods,  form  the  subject-matter  of  the  science. 

The  reason  for  subdividing  a  science  into  depart- 
ments is  that  it  is  easier  to  concentrate  the  attention 
upon  a  part  of  the  subject  than  upon  the  whole.     In 


xii  The  Distribution  of  Wealth 

order  to  fulfil  this  purpose,  the  subdivision  must  be 
such  that  in  each  department  some  definite  part  of 
the  subject-matter  is  set  off  by  itself  for  special  study. 
If  economic  goods  formed  the  subject-matter  of  the 
science,  it  would  have  to  be  so  subdivided  that  each 
department  would  study  some  particular  class  of 
goods.  If  economic  conditions  formed  the  subject- 
matter,  each  department  would  study  some  particular 
set  of  conditions.  But  if  economic  activities  form 
the  subject-matter,  then  each  department  must  set 
off  some  particular  class  of  activities  for  special 
study.  In  other  words,  the  subdivision  of  economics 
should  be  based  upon  a  classification  of  economic 
activities. 

One  very  important  group  of  economic  activities  is 
directed  toward  the  production  of  goods.  If  this  be 
broadly  defined  as  the  process  of  adding  utilities  to 
things,  it  will  include  not  only  the  activities  of  the 
producer  in  the  ordinary  sense,  but  of  the  carrier,  the 
storer,  and  the  exchanger  of  goods. '  Another  impor- 
tant group  of  activities  consists  in  extracting  the  utili- 
ties from  things,  or  in  the  consumption  of  goods.  A 
third  equally  important  group  consists  in  the  valua- 
tion of  goods.  No  one  of  these  groups  is  independent 
of  the  others,  else  we  should  have  three  separate 
sciences ;  but  each  is  sufficiently  distinct  to  permit  of 
special  study.     At  the  same  time  these  three  groups 


Introduction 


xin 


exhaust  the  category  of  economic  activities,  though 
each  is  capable  of  further  subdivision. 

These  three  classes  of  activities  should  therefore 
form  the  subjects  of  the  three  main  divisions  of  the 
science,  —  production,  consumption,  valuation.  The 
order  in  which  these  subjects  should  be  treated  and 
the  subdivisions  of  each  would  depend  upon  the 
interests  and  the  purposes  of  the  individual  writer. 
As  a  tentative  suggestion  as  to  the  subdivision  of 
the  subject  of  valuation,  the  following  outline  is  sub- 
mitted :  — 


Valuation 


of  goods 


of  services 


consumers'  goods 

land  and    natural 
agents 
producers'  goods  ]  capital 

laborers  (only  where 
slavery  exists) 
of  land  and  natural  agents ;  or  rent 
of  capital ;  or  interest 
of  laborers  ;  or  wages 
of  business  men ;  or  profits. 


The  present  work  is  primarily  an  attempt  to  ex- 
plain the  valuation  of  services,  though  a  chapter  on 
value  in  general  is  a  necessary  introduction  to  that 
explanation. 

The  writer  would  be  the  last  to  belittle  the  impor- 
tance of  the  psychical  side  of  economics;  but  the 
foregoing  discussion  will,  it  is  hoped,  help  to  make 
it  clear  that  economics  is  not  primarily  a  psychical 


XIV  The  Distribution  of  Wealth 

science.  The  psychical  element  predominates  only  in 
the  department  of  valuation.  It  is  obviously  out  of 
place  here  to  open  up  the  general  question  of  the 
nature  of  the  science ;  but  it  may  be  permissible  to 
express  the  hope  that  economics  may  remain,  as  it 
always  has  been,  a  concrete  science,  whose  aim  is  to 
explain  the  facts  of  economic  life  as  they  are  seen 
and  experienced,  first  in  our  own  economic  environ- 
ment and  afterward,  perhaps,  in  the  world  at  large. 
If  this  is  to  be  the  nature  of  the  science,  and  if  it 
is  not  to  become  an  abstract  theory  whose  aim  is  to 
follow  the  workings  of  a  single  principle  under  all 
possible  conditions,  then  the  words  "  static "  and 
"  dynamic  "  can  not  properly  designate  any  of  the 
main  divisions  of  the  science. 

Economists  who  have  passed  out  of  the  metaphysi- 
cal stage  of  their  mental  development  are  content  if 
they  can  find  a  satisfactory  explanation  of  the  facts 
of  economic  life  which  they  see  in  the  world  about 
them.  If  they  can  find  such  an  explanation,  they  are 
then  in  a  position  to  explain  how  certain  desirable 
modifications  of  these  facts  may  be  brought  about 
for  the  advancement  of  the  society  in  which  they 
live,  not  pretending  to  a  similar  knowledge  in  regard 
to  other  types  of  civilization.  Consequently,  the 
present  writer  has  not  bothered  himself  with  specu- 
lations as  to  what  the  primitive  man  may  or  may 


Introduction  XV 

not  have  done,  nor  even  with  the  way  in  which 
Orientals  of  to-day,  and  other  custom-bound  peoples, 
may  differ  from  our  own  people  in  their  methods  of 
evaluation.  He  has  tried  only  to  find  out  and 
explain  why  men  evaluate  things  as  they  do  in  com- 
munities with  which  he  is  acquainted,  in  a  civiliza- 
tion of  which  he  is  a  part. 

The  method  pursued  is  that  of  an  analytical  study 
of  the  motives  which  govern  men  in  business  and 
industrial  life.  No  one  who  knows  the  meaning  of 
terms  will  call  this  a  metaphysical,  or  even  a  strictly 
deductive,  method.  We  all  observe  certain  concrete 
facts  relating  to  the  value  of  goods  and  services,  and 
the  economist  tries  to  find  the  explanations  for  these 
facts.  If  the  search  for  these  explanations  leads  us 
to  study  the  motives  which  govern  men's  actions  in 
buying  and  selling,  it  only  means  that  it  is  necessary 
to  carry  our  study  into  the  subjective,  as  well  as  into 
the  objective,  field.  The  study  in  one  field  may  be 
quite  as  inductive  as  in  the  other,  though  there  are 
certain  facts  of  common  experience  which  only  need 
to  be  stated  and  do  not  require  elaborate  experimen- 
tation and  research  in  order  to  find  them  out.  Such 
facts  are  therefore  taken  for  granted,  but  the  analyti- 
cal economist  makes  no  more  use  of  such  facts  than 
does  the  historian  or  the  statistician,  both  of  whom 
assume  that  they  know  certain  things  about  the  be- 


xvi  The  Distribution  of  Wealth 

havior  of  men  and  do  not  stop  to  prove  them.  The 
historian,  for  example,  must  assume  that  the  men  of 
past  generations  were  moved  by  hunger  and  thirst, 
love  and  jealousy,  self-interest  and  patriotism,  just 
as  the  men  of  this  generation  are ;  but  such  is  quite 
as  violent  an  assumption  as  any  which  the  analytical 
economist  makes. 


THE 
DISTRIBUTION   OF  WEALTH 


"^      OF   THE 

UNIVERSITY 

OF 


THE 
DISTRIBUTION  OF  WEALTH 

CHAPTER  I 

VALUE 

Moved  by  the  primal  instinct  of  acquisition,  the  boy 
with  a  pocket  soon  fills  it  with  a  collection  of  things 
which  from  time  to  time  have  served  his  purpose  or 
pleased  his  fancy.  As  he  advances  in  experience  and 
knowledge  of  the  world  he  gradually  learns  to  dis- 
tinguish in  certain  of  these  things  a  quality  which 
makes  them  especially  desirable.  Things  possessing 
this  quality  give  him  a  peculiar  power  over  his  fellows 
—  the  power  of  securing  from  them  certain  of  their 
possessions  in  peaceful  and  voluntary  exchange.  In 
other  words,  such  things  possess  the  advantage  of 
being  exchangeable  for  other  desirable  things.  From 
this  time  forth  his  efforts  are  directed  more  and  more 
toward  the  securing  of  things  of  this  class,  because 
he  recognizes  more  and  more  the  strategic  advantage 
which  comes  to  him  through  the  possession  of  this 
soul-compelling  power.     With  it  he  is  able  to  com- 


2  The  Distribution  of  Wealth 

mand  the  resources  of   his  fellows  in  peaceful  and 
voluntary  exchange. 

This  evolution  which  takes  place  in  the  juvenile 
mind  is  the  counterpart  of  one  which  has  taken  place 
in  society  at  large.  In  undeveloped  societies,  accord- 
ing to  all  accounts,  each  individual  tries  to  make, 
gather,  or  otherwise  secure,  such  things  as  will 
directly  satisfy  his  own  wants  or  those  of  his  own 
family.  But  in  all  highly  developed  societies,  espe- 
cially in  our  own,  the  immediate  concern  of  the  in- 
dividual is  to  make,  gather,  or  otherwise  secure  the 
possession  of,  something  which  will  bring  him  other 
things  in  exchange  for  itself.  Having  secured  a  thing 
of  this  kind,  which  he  may  not  himself  be  able  to  use, 
he  can  depend  upon  getting  sornething  which  hgjdoes 

Jg^ant  frnm  amnng  \)np'.  pnssf^Rsinns  nf  his  f<^11nwR. 

A  thing  which  possesses  this  power  is  said  to  be 
valuable,  or  to  possess  value.  In  Walker's  brief  but 
^•excellent  phrase,  "Value  is  power  in  exchange;"^ 
and  as  Mill  defines  it,  the  value  of  a  thing  is  "its 
general  power  of  purchasing;  the  command  which 
its  possession  gives  over  purchasable  commodities 
in  general."  ^  Either  definition  accurately  expresses 
the  whole  meaning  of  the  word  "value";  but  in  popu- 
lar discussions  this  word  is  frequently  and  incorrectly 

1  "  Political  Economy,"  Part  I,  §  8. 

a  "Principles  of  Political  Economy,"  Book  III,  Ch.  i,  §  2. 


Value  3 

confused  with  "utility."  Utility  is  the  power  to  sat- 
isfy a  want  or  gratify  a  desire ;  but  value  is  always 
and  only  the  power  to  command  other  desirable  things 
in  peaceful  and  voluntary  excha.nge.  Value  depends 
upon  utility,  since  nothing  could  have  value  unless  it 
had  the  power  to  satisfy  some  want  or  gratify  some 
desire,  —  that  is  to  say,  unless  it  had  utiUty ;  yet  value 
is  not  the  power  to  satisfy  that  want  or  to  gratify  that 
desire,  but  only  the  power  to  purchase  other  things. 
On  the  other  hand,  however  useful  a  thing  may  be, 
however  necessary  it  may  be  for  our  own  comfort, 
or  even  for  our  existence,  unle^JbLhas  power  in  ex- 
change it  has  no  value.  Air  and  sunlight  and  various 
other  things  possess  utility,  but  they  do  not,  under 
ordinary  conditions,  possess  any  value.  Though  there^, 
can  be  no  value  where  there  is  no  utility,  yet  there  \ 
may  be,  and  often  is,  utility  where  there  is  no  value.  W 

The  price  of  an  article,  as  so  many  writers  on  eco- 
nomics have  explained,  is  merely  its  value  expressed 
in  terms  of  some  single  commodity  which  the  com- 
munity has  generally  agreed  upon  as  a  measure  of 
value,  which  commodity  is  usually  called  money. 
Though  this  book  is  concerned  primarily  with  prob- 
lems of  value,  the  word  "  price "  will  sometimes  be 
used,  but  only  where  no  confusion  will  result  from 
using  the  words  interchangeably. 

Accepting  "  power  in  exchange  "  as  a  good  work- 


4  The  Distribution  of  Wealth 

ing  definition  of  value,  the  first  problem  is  to  explain 
the  source  of  that  power.  Why  do  some  things  pos- 
sess it  while  others  do  not?  Why  do  some  things 
possess  more  of  it  than  others  ?  Why  does  the  same 
thing  possess  more  of  it  at  one  time  or  place  than 
at  another? 

Before  attempting  to  answer  these  questions  it  is 
important  that  we  should  remind  ourselves  that  they 
have  to  do  with  the^ value  of  real,  mncr^.tt^  articles 
such  as  a  hat,  a  loaf  of  bread,  or  a  ton  of  coal,  rather 
than  with  indefinite  classes  or  groups  of  things,  such 
as  hats-in-general,  bread-in-general,  or  coal-in-general. 
It  is  a  prevailing  vice  of  beginners  in  economics  to  be 
always  trying  to  explain  the  value  of  things-in-general 
before  they  have  adequately  explained  the  value  of 
particular  articles.  Men  do  not  buy  and  sell  things- 
in-general,  but  definite,  concrete  articles  in  specific 
quantities;  not  wheat-in-general,  but  bushels  of 
wheat;  not  land-in-general,  but  acres  of  land;  not 
gold-in-general,  but  ounces  of  gold.  The  fact  that 
different  bushels  of  wheat,  or  different  ounces  of 
gold,  are  so  nearly  alike  as  to  make  it  a  matter  of 
indifference  to  the  buyer  which  particular  bushel, 
or  which  particular  ounce,  he  gets,  does  not  alter 
the  case.  The  fact  remains  that  a  bushel  of  wheat 
or  an  ounce  of  gold  is  something  tangible  and  con- 
crete, and  it  is  always  a  definite  number  of  such  tan- 


Value  5 

gible,  concrete  units  which  are  exchanged.  Similarly, 
if  such  a  thing  as  air  were  bought  and  sold,  it  would 
not  be  air-in-general,  but  cubic  yards  of  air,  or  similar 
units. 

To  be  sure,  if  the  units  are  all  alike,  or  so  nearly 
alike  as  to  serve  the  buyer's  purpose  equally  well, 
they  will  all  have  the  same  price  at  the  same  time 
and  place.  Obviously,  no  buyer  would  pay  more  for 
one  unit  than  he  would  have  to  pay  for  another  if  he 
knew  that  the  cheaper  unit  would  serve  his  purpose 
just  as  well.  This  is  what  Marshall  has  called  the 
first  law  of  the  market.^  Since  all  units  of  such  a 
commodity  have  the  same  price,  and  since  the  price 
of  any  is  a  gauge  of  the  price  of  every  other,  it  is 
customary  to  speak  of  the  price  of  the  commodity 
without  naming  its  units.  Thus  we  uniformly  speak 
of  the  price  of  bread,  of  wheat,  of  coal,  etc.  We 
even  fall  into  the  same  habit  of  speech  with  respect 
to  the  price  of  things  of  the  same  class  even  when 
each  individual  unit  has  its  own  particular  price. 
We  speak,  for  example,  of  the  price  of  houses,  of 
land,  of  horses,  etc.  But  this  habit  of  speech  does 
not  alter  the  fact  that  value  attaches  only  to  concrete 
units  ;  it  merely  implies  (sometimes  erroneously,  how- 
ever) that  there  is  a  close  connection  between  the 
price  of  any  one  unit  and  that  of  every  other  unit  of 
1 "  Principles  of  Economics." 


6  The  Distribution  of  Wealth 

the  class  or  group  to  which  it  belongs.  Therefore 
we  have  first  to  explain  why  such  a  thing  as  a  loaf  of 
bread  has  value,  and  what  determines  the  amount  of 
that  value.  We  will  then  have  an  explanation  of  the 
value  of  all  bread  of  that  kind  and  quality,  since  that 
which  is  true  of  one  loaf  would,  under  the  same  con- 
ditions, be  true  of  every  other.  Similarly,  after  we 
have  explained  the  absence  of  value  in  a  given  cubic 
yard  of  air,  we  shall  have  an  adequate  explanation  of 
the  absence  of  value  in  air-in-general,  since  that 
which  is  true  of  one  cubic  yard  would,  under  similar 
conditions,  be  true  of  every  other.  Here  as  else- 
where the  scientific  method  is  to  deal  with  particular 
facts  first  and  general  facts  afterward. 

That  such  a  concrete  article  can  have  value  only 
when  some  one  happens  to  want  it,  is  too  obvious  to 
need  discussion.  Manifestly,  an  article  which  no  one 
wants  will  have  no  power  to  command  others  in 
peaceful  and  voluntary  exchange.  But  if  it  is  wanted 
by  others  besides  its  possessor,  it  will  have  value  un- 
less those  who  want  it  have  nothing,  not  even  ser- 
vices, to  give  in  exchange  for  it.  That  the  amount  of 
j  value  in  such  an  article  depends  upon  how  much  it 
i  is  wanted  in  comparison  with  other  things  is  perhaps 
a  trifle  less  obvious  but  none  the  less  true.  That  is 
to  say,  if  it  is  much  wanted  in  comparison  with  other 
things,  many  of  those  other  things  will  be  given  in 


Value  7 

exchange  for  it.  In  other  words,  it  will  have  a  high 
value.  But  if  it  is  little  wanted  in  comparison  with 
other  things,  few  of  those  other  things  will  be  given 
in  exchange  for  it.  In  other  words,  it  will  have  a 
low  value. 

There  are  two  primary  reasons  why  such  an 
article  may  not  be  wanted  at  all.  In  the  first  place» 
there  may  be  no  use  to  which  it  can  be  put,  no  desire 
which  it  can  possibly  satisfy,  at  least  so  far  as  is 
known  at  the  time  and  place.  In  the  second  place, 
though  the  article  may  have  important  uses,  there 
may  yet  be  available  so  many  others  just  like  it  as 
to  fully  satisfy  every  desire  to  which  it  can  minister. 
That  being  the  case,  the  particular  article  in  question 
would  not  be  wanted. 

The  latter  is  the  more  general  reason  why  a  thing 
is  not  wanted,  and  why  it  is  consequently  valueless. 
It  would  be  difficult  to  name  anything  which  could 
not  gratify  some  desire  or  be  put  to  some  use ;  but 
one  could  name  an  indefinite  number  of  things  which 
are  superfluous,  and  are  not  wanted  simply  because 
there  are  too  many  others  of  the  same  kind.  A 
cubic  yard  of  air  furnishes  a  good  example  of  this 
kind  of  superfluity.  Though  it  can  be  put  to  a 
use  no  less  important  than  the  sustaining  of  life 
itself,  it  is  not  wanted  simply  because  there  are 
ordinarily  so  many  others  available  that  the  one  in 


/ 


8  The  Distribution  of  Wealth 

question  can  be  dispensed  with  just  as  well  as  not. 
Box  it  up  and  withhold  it  from  use,  and  no  one 
will  care.  By  some  miracle  create  another,  and 
no  one  will  be  benefited.  All  this  is  true  of  any 
cubic  yard  one  can  designate :  there  is  no  want 
whose  satisfaction  depends  in  the  slightest  degree 
upon  its  existence ;  it  might  as  well  not  be  as  be,  so 
far  as  any  one  cares,  and  it  is  strictly  accurate  to  say 
that  no  one  wants  it.  Since  this  is  true  of  each  and 
every  cubic  yard,  it  follows  that  no  cubic  yard  has 
any  value.  Thus  we  arrive  at  the  explanation  of  the 
general  fact  that  air  has  no  value. 

One  might  go  a  step  farther  and  name  a  great 
many  articles  which,  though  capable  of  satisfying 
desires,  or  of  being  put  to  important  uses,  have  yet 
become  worse  than  worthless  simply  through  their 
overabundance,  or,  more  accurately,  because  there 
are  so  many  other  things  just  like  them  that  they 
have  become  a  nuisance.  Many  of  the  weeds  which 
infest  our  fields  belong  in  this  class.  Some  have 
medicinal  properties,  others  bear  flowers  which 
please  the  eye;  but  the  number  to  be  had  so  far 
exceeds  the  number  which  can  be  used  that  no  one 
of  them  is  wanted,  while  each  and  every  one  cumbers 
the  ground  and  interferes  with  the  growth  of  more 
useful  plants.  Hence  the  farmer  will  spend  time 
and  money  in  trying   to  get  rid  of  them.     Rabbits 


Value  9 

in  Australia  will  also  serve  as  an  illustration.  Such 
things  may  be  said  to  possess  negative  value,  or  to 
be  worth  less  than  nothing,  because  they  are  not 
only  not  wanted,  but  detested,  and  this  solely  be- 
cause of  their  superabundance. 

There  are,  to  be  sure,  secondary  reasons  why  an 
article  may  not  be  wanted,  but  these  will  be  found 
to  be  only  variations  of  the  primary  reasons  already 
given.  The  article  may,  for  example,  not  now  be 
in  a  usable  form,  or  this  may  not  be  a  proper  time 
for  using  it,  or  it  may  not  be  in  a  place  where  it 
can  be  used.  Yet  in  the  proper  form,  time,  and 
place  it  might  be  very  much  wanted.  If,  however, 
the  cost  of  putting  it  into  that  form,  time,  or  place 
is  so  great  as  to  more  than  balance  the  advantages 
which  could  be  derived  from  it,  no  one  will  care  to 
undertake  to  make  the  necessary  changes.  Under 
such  conditions  no  one  would  want  it  in  its  present 
state,  and  it  would  therefore  have  no  value. 

This  part  of  the  discussion  may  be  summed  up 
by  saying  that  an  article  —  a  concrete  article  such 
as  may  be  bought  and  sold  —  has  value  only  when 
it  is  wanted,  and  that  it  is  wanted  only  where  there 
are  so  few  others  like  it  as  to  only  partially  satisfy 
the  want  or  the  desire  to  which  it  ministers.  If 
there  are  so  many  others  like  it  that  the  want  is 
fully  satisfied,  the   one  in   question  is   not   wanted 


lO  The  Distribution  of  Wealth 

at  all,  and  this  would  be  true  also  of  each  and 
every  one  considered  singly.  But  if  there  are  not 
enough  to  go  around  and  satisfy  all  who  want 
it,  each  and  every  unit  (of  the  same  kind  and  qual- 
ity) will  be  wanted  and  will  consequently  have  a 
value. 

If  it  is  correct  to  say  that  such  an  article  has  value 
only  when  it  is  wanted,  it  is  equally  correct  to  say 
that  it  has  little  value  when  it  is  little  wanted, 
and  much  value  when  it  is  much  wanted,  in 
comparison  with  other  things.  Following  out  the 
argument  it  would  be  easy  to  show  that  there  are 
two  primary  reasons  why  such  an  article  may  be 
little  wanted.     In  the  first  place,  the  uses  to  which 

yit  can  be  put  may  be  trifling  and  insignificant,  the 
wants  to  which  it  ministers  may  be  of  so  little  im- 
portance that  there  would  be  no  great  privation  if 
they  were  left  entirely  unsatisfied.  In  the  second 
place,  though  the  wants  to  which  it  ministers  may  be 
of  considerable  importance,  —  that  is  to  say,  though 
there  would  be  great  privation  if  nothing  could  be 
had  to  satisfy  them,  —  yet  these  wants  may  be  so 
nearly  satisfied  by  an  abundance  of  other  articles 
just  like  the  one  in  question,  or  so  nearly  like  it  as 

/to  be  good  substitutes  for  it,  that  this  particular 
article  may  not  be  much  wanted.  If  it  were  with- 
held from  use  or  destroyed,  there  would  be  no  great 


Value  1 1 

loss,  and  no  great  gain  if  another  like  it  were 
created.  Under  these  conditions  comparatively  few 
other  things  would  be  given  in  exchange  for  this  one, 
or  for  any  other  of  the  same  kind  and  quality.  A 
man  will  usually  give  in  exchange  for  a  thing  some- 
thing which  he  wants  less  than  he  does  that  thing. 
But  if  the  wants  to  which  an  article  ministers  are 
of  considerable  importance,  and  if  there  are  few 
other  articles  to  help  satisfy  those  wants,  then  each 
and  every  such  article  will  be  much  wanted,  and  a 
comparatively  large  number  df  other  things  will  be 
given  in  exchange  for  it. 
^  /  To  say  that  an  article  has  value  only  when  it  i^. 
panted,  is  the  same  as  saying  that  it  has  value  only  ] 
(when  it  has  utility,  for  utility  is,  by  definition,  th^ 
Ipower  to  satisfy  a  want.  Whether  that  want  be 
fundamental,  like  hunger,  or  only  whimsical,  like  the 
desire  for  the  latest  novelty,  does  not  affect  the  case. 
Whether  the  want  be  commendable  or  blameworthy 
is  likewise  a  matter  of  indifference  so  far  as  this 
question  is  concerned.  Whatever  the  nature  of  the 
want  may  be,  the  power  to  satisfy  it  is  called  utility. 
The  fact  that  an  article  is  wanted,  whatever  the  pur- 
pose may  be,  is  sufficient.  To  say  that  an  article  has 
value  only  when  there  are  not  enough  things  like  it 
to  go  around  and  satisfy  all  who  want  them,  is  the 
same  as  saying  that  it  has  value  only  when  the  class 


12  The  Distribution  of  Wealth 

to  which  it  belongs  is  scarce,  for  scarcity  is,  by  defini- 
tion, insufficiency  to  satisfy  wants.  A  thing  may  be 
rare,  for  example,  without  being  scarce.  That  is  to 
say,  however  little  there  may  be  of  it,  if  that  little  is 
more  than  is  wanted,  it  cannot  be  said  to  be  scarce. 
(5n  the  other  hand,  however  abundant  it  may  be,  if 
there  is  not  enough,  it  is  said  to  be  scarce.  Speak- 
ing absolutely,  there  may  be  more  grass  than  weeds 
in  any  community,  but  relatively  to  wants,  grass  is 
scarce  while  weeds  are  superabundant. 

Assuming  only  that  things  of  any  given  class  are 
appropriable  and  not,  like  the  moon  and  the  stars, 
beyond  human  control,  it  is  safe  to  say  that  utility 
and  scarcity,  and  these  alone,  are  necessary  to  give 
them  value.  Where  both  qualities  are  present  there 
is  always  value.  Where  either  is  lacking  there  is  no 
value.  The  reader  is  hereby  challenged  to  find  an 
exception  to  this  rule  in  any  civilized  community. 
Since  the  scarcity  of  an  article  implies  that  it  is  use- 
ful, one  might  go  so  far  as  to  maintain  that  scarcity 
alone  is  necessary  to  give  it  value ;  but  there  is  no 
advantage  in  carrying  the  discussion  so  far  as  that. 
Value  not  only  depends  upon  utility  and  scarcity,  but 
it  varies  with  these  two  qualities.  That  is  to  say, 
the  more  useful  a  class  of  things  becomes  the 
greater  their  individual  value,  provided  they  do  not 
increase  in  amount  at  the  same  time ;  and  the  scarcer 


Value  13 

they  become  the  greater  their  value,  provided  they  do 
not  decline  in  utility  at  the  same  time. 

It  has  long  been  observed  that  whenever  any  com- 
modity, or  class  of  salable  objects,  becomes  more 
abundant  in  comparison  with  other  things,  every  unit 
of  that  commodity  becomes  less  valuable,  unless  this 
increase  in  amount  has  been  accompanied  by  some 
change  in  the  habits  or  the  wants  of  the  community, 
which  calls  for  more  of  the  commodity.  Similarly, 
if  new  uses  are  discovered  for  the  commodity,  or  if 
more  people  come  to  desire  it  for  any  reason  what- 
ever, its  value  will  tend  to  rise,  provided  its  amount 
does  not  increase  at  the  same  time.  This  is,  of 
course,  nothing  more  than  the  well-known  law  qL 
supply_aiid^  demand^ — a  law  which  rests  upon  gen- 
eral observation  and  experience  rather  than  economic 
analysis. 

But  this  general  observation  is  to  be  explained  by 
means  of  another  fact  of  common  experience,  —  a 
fact  which  is  itself  so  elementary  as  to  need  no  ex- 
planation. ^   I  refer  to  the  fact  that  the  more  fully  a 
want  is  satisfied  the  less  intense  it  becomes)     Every  ,,^  //- 
boy  knows  that  the  first  apple  which  he  eats,  at  any 
one  time,  tastes  better  than  the  second,  provided  they  ^jo^^^ 
are  alike,  and  the  second  better  than  the  third,  and  <v»t*^*^' 
so   on.      He  knows  also  that,  however   hungry  for 
apples  he  may  have  been  at  the  start,  if  the  supply 


ft\  A' 


14  The  Distribution  of  Wealth 

of  apples  only  holds  out,  he  will  ultimately  have 
enough.  In  other  words,  he  will  reach  a  point  of 
complete  satisfaction  so  far  as  that  particular  want 
is  concerned.  When  this  point  is  reached  apples  will 
have  lost  their  utility  for  him,  for  the  time  beiqg, 
and  the  more  nearly  he  approaches  this  point  the 
less  utility  they  will  have,  —  that  is,  the  less  he  will 
want  them.  Upon  a  class  of  facts  so  elementary  as 
this  is  the  law  of  value  based,  and  this  law  governs, 
in  the  main,  the  industrial  and  commercial  activities 
of  society,  and  furnishes  a  basis  for  a  large  part  of 
the  science  of  economics. 

The  importance  of  these  elementary  facts  relating 
to  the  satiability  of  wants  will  become  perfectly 
evident  if  we  will  but  consider  two  other  facts : 
first,  all  industry  is  carried  on  for  the  purpose  of 
satisfying  wants ;  second,  that  which  was  said  of  the 
boy's  appetite  for  apples  can  be  said  of  every  human 
want,  viz.,  that  it  is  satiable,  and  it  becomes  less 
intense  as  it  approaches  the  point  of  satiety.  This 
must  not  be  interpreted  to  mean  that  the  desire 
for  wealth  in  general  can  be  completely  satisfied. 
Wealth  is  only  a  collective  name  for  all  the  means 
of  satisfying  economic  wants  of  every  kind.  If  the 
desire  for  wealth  is  insatiable,  it  is  because  new 
wants  arise  as  fast  as  the  old  ones  are  satisfied.  It 
still  remains  true  that  any  particular  want,  or  the  de- 


Value  1 7 

In  addition  to  the  fact  that  the  individual's  desire 
for  a  commodity  declines  in  intensity  as  that  desire 
approaches  satiety,  there  is  the  fact  that  different 
individuals  differ  greatly  in  the  range  and  intensity 
of  their  desires.  Of  a  given  commodity  it  may  be 
true  that  a  great  many  people  do  not  want  it  at  all, 
and  those  who  do  may  differ  greatly  in  the  intensity 
with  which  they  want  it.  They  may  differ  also  in 
the  intensity  with  which  they  desire  other  things  for 
which  the  commodity  is  exchangeable.  In  that  case, 
if  there  is  only  a  small  supply  of  this  commodity  on 
the  market,  it  will  go  to  those  who  want  it  most  in 
comparison  with  other  things,  —  that  is,  to  those  who 
are  willing  to  give  the  largest  number  of  other  things 
for  it.  But  if  the  supply  is  increased,  it  must  be 
sold  at  a  price  which  will  either  tempt  the  original 
consumers  to  buy  more  of  it,  or  tempt  a  new  group 
to  become  consumers.  From  the  social  standpoint, 
this  is  only  another  phase  of  the  principle  of  di- 
minishing utility.  For  if  the  original  consumers 
use  the  increased  supply  of  the  commodity,  they 
will  have  to  use  it  in  the  satisfaction  of  less  in- 
tense wants,  or  the  extra  units  consumed  will  yield 
them  less  satisfaction  than  did  the  original  units. 
But  if  the  increased  supply  is  used  by  a  new  group 
of  consumers,  it  will,  in  this  case  also,  furnish  less 
relative   satisfaction,  —  that   is,    less   satisfaction   as 


1 8  The  Distribution  of  Wealth 

compared  with  that  which  other  goods  might  fur- 
nish. 

But  there  are  commodities,  such  as  watches,  bi- 
cycles, automobiles,  etc.,  of  which  the  average  indi- 
vidual desires  only  one  unit.  His  desire  for  one 
may  be  very  intense,  but  he  may  not  care  at  all  for 
a  second  (though  he  may  desire  a  better  one  than  he 
now  has).  But  even  in  such  cases  the  principle  of 
diminishing  utility  applies  in  the  social  sense.  Indi- 
viduals differ  greatly  in  their  desire  for  such  a  com- 
modity, and  a  small  supply  will  go  to  those  who  want 
it  most  in  comparison  with  other  things,  because  they 
will  offer  most  in  exchange  for  it.  A  larger  supply 
would  have  to  be  sold  at  a  lower  price  if  it  were  sold 
at  all,  in  order  to  tempt  a  new  group  of  consumers, 
who  want  it  less  in  comparison  with  other  things,  to 
become  buyers. 

This  principle  of  diminishing  utility  may  be  illus- 
trated by  means  of  the  diagram  on  page  19. 

Let  us  suppose  that  the  amount  of  a  given  com- 
modity, bread  for  example,  in  a  given  time  and  place, 
is  measured  along  the  horizontal  line  OX^  while  its 
utility,  or  want-satisfying  power,  is  measured  along 
the  perpendicular  line  O  V.  Thus,  if  there  were  only 
one  unit,  say  a  loaf  of  bread,  its  utility  would  be 
represented,  let  us  assume,  by  the  line  OA.  But  if 
the  number  of  loaves  should  increase  so  that  the 


Value 


19 


total  amount  would  be  represented  by  the  line  OG^ 
the  utility,  or  want-satisfying  power  of  each  loaf, 
would  be  somewhat  less  than  before  and  would  be 
represented,  let  us  say,  by  the  perpendicular  line  GB^ 
or  OJ.  This,  of  course,  assumes  that  there  has  been  I  <**^  ^ 
no  corresponding  increase  in  the  number  of  personsfuai.  ?  ^ 
wanting  bread,  or  in  the  amount  which  each  person      \*'* 


"xB 


^-vD 


*^^^ 


..^^ 


E"---.^^. 


.^  ..^..j-uia^ 


wants.  Following  out  this  plan,  if  the  supply  should 
increase  to  the  point  H  or  the  point  /  in  the  line  OX, 
the  utility  of  each  loaf  would  fall,  let  us  say,  to  the 
point  K  or  Z,  on  the  line  O  F,  or  be  measured  by  the 
line  HC  or  ID.  At  whatever  point  on  the  line  OX 
the  supply  is  cut  short,  the  utility  of  each  unit  will  be 
measured  by  the  perpendicular  distance  from  that 
point  to  the  dotted  curve  ABCDEF,  which  may  be 
called  the  utility  airve  of  the  commodity  in  question. 


20  The  Distribution  of  Wealth 

Accordingly,  if  the  supply  should  reach  the  point  Ey 
each  unit  would  become  useless  —  considered  by  itself 
—  like  a  cubic  yard  of  air ;  while  if  the  supply  should 
increase  beyond  the  point  E,  each  unit  would  become 
worse  than  useless,  like  weeds  and  other  nuisances 
whicl^  have  a  negative  utility. 


Though  there  is  no  known  exception  to  the  rule, 
that,  other  things  equal,  a  want  declines  in  intensity 
as  the  thing  wanted  is  supplied  in  increasing  quanti- 
ties, it  would  be  a  mistake  to  assume  that  all  wants 
decline  at  the  same  rate.  As  a  matter  of  fact,  differ- 
,  ent  wants  decline  at  very  different  rates.  The  desire 
for  one  thing,  salt  for  example,  may  be  a  very  intense 
one  in  the  sense  that  it  would  be  a  great  hardship  to 
be  deprived  of  it  altogether,  and  yet  a  very  little  may 
suffice,  while  a  very  little  more  would  become  posi- 
tively detrimental.  The  desire  for  another  commod- 
ity, potatoes  for  example,  may  at  first  be  no  more 
intense,  in  the  sense  that  it  would  be  no  greater  hard- 
ship to  be  deprived  altogether  of  potatoes  than  to 
be  deprived  of  salt,  and  yet  a  much  larger  amount  of 
this  commodity  may  be  consumed  before  the  point 
of  satiety  is  reached.  In  this  case  the  want  is  said  to 
be  elastic,  because  it  can  adjust  itself  to  great  varia- 
tions in  the  supply  of  the  thing  wanted.  No  severe 
hardship  is  felt  if  the  supply  is  greatly  reduced,  and 
yet  a  considerable  increase  in  the  supply  could  be 


Value  21 

consumed  without  completely  satisfying  the  want. 
In  the  former  case,  the  want  is  said  to  be  inelastic  for 
the  opposite  reason.  Returning  to  the  diagram  on 
page  19,  an  elastic  want  would  be  represented  by 
drawing  the  utiUty  curve  ABCDEFso  as  to  fall  grad- 
ually toward  the  base  line  0X\  while  an  inelastic 
want  would  be  represented  by  drawing  that  curve 
so  as  to  fall  sharply  toward  the  base  line. 

The  principle  of  diminishing  utility  enables  us  to 
explain  and  account  for  some  of  the  observed  tenden- 
cies of  the  market  relating  to  value,  the  most  impor- 
tant of  which  is  the  one  already  mentioned,  viz.,  that, 
other  things  equal,  the  value  of  any  commodity  rises 
when  its  supply  decreases,  and  falls  when  its  supply 
increases.  But,  it  must  also  be  observed,  other  things 
are  not  always  equal.  There  may  be  any  number  of 
other  changes  going  on  at  the  same  time,  some  of 
which  will  counteract,  or  completely  offset,  while 
others  increase,  the  effect  of  the  increase  or  decrease 
in  the  supply.  For  example,  the  population  may  be 
increasing  or  diminishing ;  the  taste  or  desire  for  the 
commodity  in  question  may  be  growing  or  declining ; 
the  supply  of  other  things,  for  which  the  one  in  ques- 
tion is  exchangeable,  may  be  increasing  or  decreas- 
ing; or  the  taste  or  desire  for  any  or  all  of  these 
other  things  may  be  growing  or  declining.  Any  of 
these  changes  will  affect  the  amount  of  other  things 


22  The  Distribution  of  Wealth 

which  will  be  offered  in  exchange  for  a  given  unit  of 
the  one  in  question  because  they  will  help  to  deter- 
mine how  much  it  is  wanted  m  comparison  with  other 
things.  That  is  to  say,  the  value  of  a  thing  depends 
^^^^noX.  alone  on  its  supply,  but  in  part  upon  its  demand, 
.A^f^'?  since  the  demand  for  a  thing  depends  partly  upon  the 
number  of  people  who  want  it,  partly  upon  how  much 
each  one  wants  it,  partly  upon  how  many  other 
things  he  has  which  he  can  give  in  exchange  for  it, 
and  partly  upon  how  much  he  wants  these  other 
things. 

That  the  demand  for  an  article  varies,  other  things 
equal,  with  the  number  of  people  wanting  it  is  too 
obvious  to  need  discussion.  It  is  equally  obvious 
that  when  each  individual  wants  more  of  it  than  he 
did  before,  through  some  change  of  fashion  or  taste, 
the  demand  will,  other  things  equal,  increase,  and 
vice  versa.  But  the  relation  which  the  supply  of 
other  things  bears  to  the  demand  for,  and  the  value 
of,  any  given  article  may  not  be  so  obvious.  It  may 
be  made  clear,  however,  by  reminding  ourselves  that 
the  intensity  of  one's  desire  for  those  other  things,  as 
well  as  that  of  his  desire  for  the  one  in  question, 
depends  partly  upon  how  much  he  has  of  them.  If 
they  are  supplied  in  such  abundance  that  the  desire 
for  them  is  nearly  satisfied,  obviously  a  larger  quan- 
tity of  them  will  be  given  in  exchange  for  a  unit  of 


Value 


23 


the  commodity  in  question  than  would  be  given  if 
they  were  scarcer  and  the  desire  for  them  not  so 
nearly  satisfied.  When  the  others  are  abundant  and 
the  one  is  scarce,  a  given  unit  of  the  one  will  be  much 
wanted  in  comparison  with  similar  units  of  the  others, 
and  vice  versa,  given  units  of  the  others  will  be  Uttle 
wanted  in  comparison  with  a  similar  unit  of  the  one. 
This  may  be  illustrated  by  means  of  the  following 
diagrams :  — 


3' 


X. 


^ 


O    A 

APPLES 


I  o"~r 


t:-.. 


BREAD 


•^X'    0"  A"  D' 

CHEESE 


]::-. 


^>0(" 


Let  the  three  figures  be  understood  to  represent 
the  supply  and  the  utility,  or  want-satisfying  power, 
of  apples,  bread,  and  cheese,  respectively,  according 
to  the  interpretation  of  the  diagram  on  page  19. 
Let  us  suppose  that  the  supply  of  apples  remains 
fixed,  and  that  it  is  measured  by  the  line  OA,  while 
the  supplies  of  bread  and  cheese  vary,  that  of  bread 
being  measured  at  one  time  by  the  line  O  A  and  at 
another  time  by  the  line  O^ D  \  and  that  of  cheese  at 
one  time  by  line  (^'A"  and  at  another  time  by  the 
line  0"D''.  Let  it  be  further  supposed  that  the 
dotted  curves  YBX,  V'B'E'X',  and  Y^'B"£''X"  are 


P 


24  The  Distribution  of  Wealth 

the  utility  curves  of  apples,  bread,  and  cheese,  re- 
spectively. Then  the  utility  of  a  unit  —  say  a  pound 
—  of  apples  will  be  represented  by  the  line  AB. 
When  the  supplies  of  bread  and  cheese  are  meas- 
ured by  the  lines  O'A'  and  0"A^',  respectively,  the 
utility  of  a  pound  of  bread  will  be  measured  by  the 
line  A'B',  and  that  of  a  pound  of  cheese  by  the  line 
A"B" ,  Under  these  conditions  the  utility,  or  want- 
satisfying  power,  of  a  pound  of  bread  or  a  pound  of 
cheese  will  be  greater  than  that  of  a  pound  of 
apples,  as  shown  by  the  fact  that  the  lines  A'B'  and 
A"B"  are  each  longer  than  the  line  AB,  When  this 
is  the  case,  less  than  a  pound  of  bread  or  cheese 
will  be  given  in  exchange  for  a  pound  of  apples, 
which  means  that  apples  are  less  valuable  than 
bread  and  cheese.  But  if  the  supply  of  bread 
should  increase  to  the  point  Z>',  and  that  of  cheese 
to  the  point  Z>'^  the  utility  of  a  pound  of  the  one 
would  fall  to  the  line  D'E'^  and  that  of  a  pound  of  the 
other  to  the  line  D"E".  Under  these  conditions  the 
utiHty  of  each  would  be  less  than  that  of  a  pound  of 
apples,  as  shown  by  the  fact  that  the  lines  D'E'  and 
D"£"  are  each  shorter  than  the  line  AB.  Conse- 
quently, more  than  a  pound  of  either  would  be 
given  in  exchange  for  a  pound  of  apples,  which 
is  the  same  as  saying  that  apples  would  be  more 
valuable  than  they. 


Value  25 

The  conclusions  thus  far  reached  may  be  summa- 
rized as  follows:  i.  An  explanation  of  value  must 
begin  with  concrete,  tangible  articles,  rather  than 
with  whole  groups  or  classes.  2.  An  article  has 
value  only  when  it  is  wanted.  3.  It  is  wanted 
only  when  there  are  so  few  other  things  like  it  that 
the  desire  to  which  it  ministers  is  not  completely 
satisfied.  4.  The  amount  of  its  value  depends  upon 
how  much  it  is  wanted  in  comparison  with  other 
things.  5.  How  much  it  is  wanted  depends  upon 
how  much  the  desire  for  it  lackg  of  being  completely 
satisfied.  6.  How  much  it  is  wanted,  in  comparison 
with  other  things,  depends  partly  upon  how  scarce 
those  other  things  are,  since  all  of  the  foregoing 
propositions  apply  also  to  each  of  them. 

These  conclusions  all  lead  up  to,  and  help  to 
explain,  the  well-known  law  of  supply  and  demand, 
which  is  that  the  value  of  a  unit  of  any  commodity 
depends  upon  the  supply  of  the  commodity  and  the 
demand  for  it,  varying  inversely  with  the  supply 
and  directly  with  the  demand,  the  supply  being 
defined  as  the  amount  on  hand,  or  available  at  the 
time  and  place;  and  the  demand  being  defined  as 
the  desire  for  the  commodity,  coupled  with  the  ability 
to  purchase  it.  Since  the  different  units  of  the  com- 
modity, if  they  are  all  alike,  will  have  to  sell  for 
the  same  amount  at  the  same  time  and  place,  we 


26  The  Distribution  of  Wealth 

can  rise  to  the  conception  of  the  value  of  the  com- 
modity as  a  whole,  which  is  simply  the  sum  of  the 
values  of  its  constituent  units.  Since  such  quantities 
as  are  out  of  reach,  like  the  gold  in  the  bowels  of 
the  earth,  are  not  available  for  use,  they  form  no 
part  of  the  supply,  as  already  defined.  Neither,  for 
the  time,  does  wheat  that  is  **  cornered,"  nor  does 
anything  else  thus  artificially  withheld  from  use. 
Since  the  ability  to  purchase  a  commodity  implies 
the  possession  of  other  exchangeable  things,  it  will 
readily  be  understood  how  this  affects  its  value,  or 
helps  to  determine  how  much  it  is  wanted  in  com- 
parison with  other  things.  The  law  of  supply  and 
demand,  as  thus  defined  and  explained,  is  the  domi- 
nating law  of  the  market  in  this  commercial  age, 
whatever  may  have  been  the  law  in  other  ages,  or 
under  other  types  of  civilization. 

If  we  have  satisfied  ourselves  that  a  commodity 
has  value  only  when  there  is  a  demand  for  it,  and 
when  the  supply  is  insufficient  to  satisfy  that  de- 
mand, the  next  question  to  arise  is,  Why  is  the 
supply  insufficient,  or  why  are  commodities   scarce  ? 

Of  course  the  first  and  most  obvious  answer  is 
that  nature,  unaided,  does  not  provide  them  in  suf- 
ficient abundance  for  the  people  who  want  them. 
Perhaps  it  would  be  more  accurate  to  say  that  nature 
does  not  supply  such  things  in  the  forms  which  are 


Value  27 

needed,  nor  at  the  time  when,  and  the  place  where, 
they  are  needed.  This  is  as  far  back  as  we  need  to 
carry  the  inquiry.  To  try  to  carry  it  further  would 
involve  us  in  the  discussion  of  such  questions  as, 
Why  is  the  earth  constituted  as  it  is  ?  Why  are 
there  so  many  people .''  or,  Why  do  they  want  so 
many  things  ?  Accepting,  therefore,  as  our  starting- 
point,  the  indisputable  fact  that  nature  has  not  pro- 
vided things  enough  to  go  around  and  satisfy  the 
expanding  wants  of  the  human  species,  we  have  next 
to  inquire  how  far,  and  under  what  conditions,  it  is 
possible  to  increase  these  natural  supplies.^ 

There  are  a  few  things  which  can  not  now  be 
increased  by  any  human  effort,  and  whose  supplies 
are  therefore   absolutely  fixed.      Meteoric  iron  has 

^  It  would  be  interesting,  at  this  point,  to  turn  aside  from  our  main 
inquiry  to  consider  the  relation  of  this  problem  to  some  of  the  broader 
questions  of  sociology  and  philosophy.  This  insufficiency  in  the  supply 
of  usable  things  is  the  most  important  phase  of  the  general  fact  that 
man  is  out  of  harmony  with  his  environment.  It  must  therefore  be 
made  the  starting-point  of  any  general  inquiry  into  the  laws  of  social 
development.  From  this  insufficiency  of  goods  arises  the  fact  of  un- 
satisfied wants,  and  of  the  fundamental  antagonism  of  interests  among 
mankind.  This  is  the  original  and  all-sufficient  reason  for  the  organi- 
zation of  systems  of  social  control.  Industry  is  merely  the  human 
method  of  restoring  the  harmony  between  the  species  and  its  environ- 
ment, civilized  man  being  the  animal  who  succeeds  largely  in  adapting 
his  environment  to  himself,  whereas  other  species  must,  in  the  main,  be 
adapted  to  their  environments,  or  live,  if  they  succeed  in  living  at  all, 
forever  out  of  harmony  with  it. 


28  The  Distribution  of  Wealth 

long  served  as  a  standard  illustration  of  this  class  of 
goods.  So  far  as  present  conditions  are  concerned, 
it  would  probably  be  fair  to  include,  also,  such  things 
as  rare  curios,  relics,  autographs,  manuscripts,  etc.,  as 
well  as  ancient  pieces  of  statuary  and  the  paintings 
of  old  masters,  though  by  more  diligent  search  and 
the  vigorous  prosecution  of  the  work  of  excavation, 
the  world's  available  stock  of  some  of  these  things 
may  be  appreciably  increased.  It  might  also  be  per- 
missible to  include  land  in  this  class,  since  the  super- 
ficial area  of  the  earth  cannot  be  increased.  However, 
certain  small  areas  have  been,  and  are  still  being,  re- 
claimed from  the  sea  and  the  desert,  thus  increasing 
in  a  small  degree  the  available  supply.  This  point 
will  be  more  fully  discussed  in  the  chapter  on  the 
Rent  of  Land. 

But  the  category  of  goods  whose  supplies  are 
determined  by  nature,  independently  of  human  ef- 
fort, is  soon  exhausted.  By  their  industry  men  can 
and  do  increase  the  supply  of  nearly  every  class  of 
commodities.  If  the  value  of  an  article  is  only  great 
enough,  men  will  usually  find  some  way  of  reproduc- 
ing it.  In  fact,  most  of  the  articles  which  figure  on 
the  market  do  not  naturally  exist  at  all  in  a  usable 
form,  and  if  they  do  so  exist  they  are  not  found  in 
the  place  where,  or  at  the  time  when,  they  are 
wanted.     In  such  cases  the  whole  of  the  existing 


Value  29 

supplies  have  come  into  the  market  because  men 
have  made  the  necessary  efforts  to  bring  them  there. 
These  efforts  fall  into  one  of  three  classes.  First, 
those  which  change  materials  from  a  useless  to  a  use- 
ful form,  or  from  a  less  useful  to  a  more  useful  form, 
as  when  a  miller  grinds  wheat  into  flour;  second, 
those  which  take  materials  from  a  place  where  they 
are  not  wanted  to  a  place  where  they  are  wanted, 
or  from  a  place  where  they  are  less  wanted  to  a 
place  where  they  are  more  wanted,  as  when  a  rail- 
road carries  wheat  from  Montana  to  Chicago ;  third, 
those  which  hold  materials  from  a  time  when  they 
are  not  wanted  until  a  time  when  they  are  wanted, 
or  from  a  time  when  they  are  less  wanted  until  a 
time  when  they  are  more  wanted,  as  when  ice  is 
stored  in  winter  to  be  used  in  summer,  or  when 
wheat  is  collected  after  harvest  and  stored  in 
elevators  until  called  for  by  millers  to  supply  the 
current  demand  for  flour.  It  is,  of  course,  unneces- 
sary to  add  that  men  do  not  create  materials.  They 
only  add  to  their  utility,  or  render  them  more  usable, 
in  one,  or  all,  of  the  three  ways  mentioned.  This  is 
what  is  meant  by  the  productjon  of  goods,  and  it 
should  be  remembered  that  goods  are  not  really  pro- 
duced until  they  are  not  only  made  into  usable  forms, 
but  also  brought  to  the  places  where,  and  kept  until 
the  times  when,  they  are  wanted.      When  materials 


JO  The  Distribution  of  Wealth 

are  thus  made  usable,  the  supply  of  goods  is  said  to 
be  increased. 

Though  nearly  every  commodity  is  supplied,  or  at 
least  increased  in  quantity,  by  human  effort,  the 
amount  of  effort  which  is  necessary  to  produce  a 
given  quantity,  say  a  pound,  of  one  commodity  may 
be  widely  different  from  that  which  is  necessary  to 
produce  the  same  quantity  of  another.  It  is,  for 
example,  much  harder  to  produce  a  pound  of  gold 
than  a  pound  of  coal.  When  it  requires  a  great  deal 
of  effort  to  produce  an  article,  no  one  will  ordinarily 
be  tempted  to  make  that  effort  unless  the  article  has 
a  great  deal  of  value ;  but  if  it  can  be  prodijced  with 
a  very  little  effort,  men  will  be  willing  to  make  that 
effort  even  though  the  value  of  the  article  be  cor- 
respondingly small.  Speaking  generally,  an  article 
must  have  value  enough  to  persuade  men  to  make 
whatever  effort  is  necessary  for  its  production,  or  it 
will  not  be  produced  at  all.  If  for  any  reason  the 
demand  for  gold  should  fall  off  until  its  value  should 
fall  to  something  Hke  the  value  of  coal,  men  would 
stop  producing  it  because  its  value  would  not  then 
pay  them  for  their  work.  Gold  would  then  grow 
scarcer,  and  this  growing  scarcity  would  ultimately 
give  it  a  higher  value.  If  its  value  should  rise  to  a 
point  which  would  again  tempt  men  to  undertake  its 
production,  this  growing  scarcity  would  be  checked 


Value  3 1 

by  the  new  supplies  which  would  be  brought  forth, 
and  this,  in  turn,  would  check  its  rise  in  value.  If, 
on  the  other  hand,  coal  should,  for  any  reason, 
acquire  a  value  far  higher  than  is  necessary  to  tempt 
men  to  undertake  its  production,  so  many  would  then 
be  led  into  the  work  of  producing  it  (provided  it 
were  not  monopolized)  as  to  greatly  increase  its 
supply.  But  this  increase  in  its  supply  would  again 
bring  down  its  value.  Then  if  its  value  should  fall 
to  a  point  which  would  no  longer  tempt  business 
enterprise,  the  increase  in  its  supply  would  be 
checked,  and  this,  in  turn,  would  check  its  fall  in 
price.  Moreover,  if  its  price  should,  for  any  reason, 
fall  below  its  cost  of  production,  men  would  stop 
producing  it  until  its  price  rose  to  a  remunerative 
point.  The  general  result  is,  in  the  case  of  a  repro- 
ducible commodity  whose  production  is  not  monopo- 
lized, that  its  value  bears  a  fairly  close  relation  to  the 
cost  of  producing  it.  That  is  to  say,  its  value  can 
not  be  permanently  much  above  or  below  its  cost  of 
production. 

The  fact  that  the  value  of  a  commodity  is,  nor- 
mally, about  equal  to  its  cost  of  production,  has  led 
a  great  many  to  the  erroneous  conclusion  that  it  is 
its  cost  of  production  which  gives  it  its  value.  This 
is  probably  the  source  of  more  error  and  confusion 
in    economic    discussions  than  any  other  mistake. 


ja  The  Distribution  of  Wealth 

I  The  fact  is  that  value  is  always  and  everywhere  due 
i  to  utility  and  scarcity,  and  to  these  alone.     Cost  of 
production  affects  value  only  when,  and  so  far  as,  it 
affects  scarcity.     As  already  pointed  out,  there  are 
some  things  which  have  value  though  they  can  not 
be  produced  at  any  cost ;  and  there  are  others  which 
can  not  now  be  reproduced.     Evidently  the  cost  of 
producing  an  acre  of  land  has  nothing  to  do  with  its 
value,  since  the  scarcity  of  land  is  determined  inde- 
pendently of  its  cost  of  production.     The  same  may 
be  said  of  one  of  Raphael's  Madonnas.     But  when  a 
commodity  is  actually  being  produced  by  contempo- 
rary effort,  it  will   usually  happen  that  it  will  be 
/scarce  if  it  is  hard  to  produce,  for  the  simple  reason 
/  that  it  will  not  be  produced  at  all  unless  it  is  scarce 
/   enough  to  command  a   high   price.     On  the  other 
I    hand,  if  it  is  easy  to  produce,  it  will  ordinarily  be 
I     abundant  for  the  reason  that  it  will  be  produced  until 
I     it  becomes   so  abundant  as  to  reduce  the  price  to 
I     something  like  its  cost  of  production. 

Another  popular  form  of  this  error  is  that  labor 
creates  value.  Labor  (together  with  enterprise  and 
waiting)  produces  goods,  —  that  is,  it  puts  materials 
into  usable  form.  But  the  same  goods  would  have 
the  same  value  even  if  they  rained  from  the  sky 
—  provided  only  that  they  were  equally  scarce.  A 
meteorite  which    falls  from   the    sky  is  worth    as 


Value  33 

much  as  a  similar  piece  of  material  excavated  with 
great  labor.  On  the  other  hand,  no  amount  of 
labor  expended  in  making  an  article  which  no  one 
wants,  or  of  which  there  is  an  overabundance,  will 
give  it  any  value.  It  would  be  more  nearly  accu- 
rate to  say  that  labor  is  expended  in  the  produc- 
tion of  goods  because  such  goods  have  value,  or 
because  it  is  known  that  they  will  have  value 
when  they  are  completed.  But,  of  course,  the 
truth  which  it  is  intended  to  state  when  it  is  said 
that  labor  creates  value  is  that,  in  most  cases,  labor 
is  necessary  in  order  to  put  things  into  a  form, 
place,  or  time  in  which  they  are  wanted,  or  in 
which  they  will  have  value.  Concerning  the  argu- 
ment so  often  heard,  that  if  there  were  no  labor 
there  would  be  no  value,  or  very  little  of  it,  it  is 
only  necessary  to  say  that  if  there  were  no  land, 
or  air,  or  sunlight,  there  would  be  no  value.  In 
fact,  there  are  a  number  of  agencies  which  are 
absolutely  essential  to  the  existence  of  value.  But 
this  does  not  prove  that  any  one  of  these  agencies 
is  the  creator  of  value.  Some  things  increase  in 
value,  with  time,  and  in  these  cases  waiting  is 
quite  as  essential  as  labor. 

It  seldom  happens  that  all  units  of  a  given  com- 
modity are  produced  at  a  uniform  cost.  Some  are 
produced   under  favorable,   others    under    unfavor- 


OF   THjr 


34  The  Distribution  of  Wealth 

able,  natural  conditions ;  some  by  efficient,  others 
by  inefficient,  men ;  and  some  by  economical,  others 
by  uneconomical,  methods.  But  however  they  may 
differ  in  cost,  they  will  all,  at  any  given  time  and 
place,  sell  for  a  uniform  price,^  provided  they  are 
alike.  That  is,  if  they  are  all  equally  desirable 
from  the  buyer's  standpoint,  they  will  all  sell  at 
the  same  price,  regardless  of  differences  in  their 
cost  of  production.  It  is  a  matter  of  indifference 
to  the  buyer  of  a  ton  of  coal  whether  it  was  mined 
near  the  surface  or  deep  down  in  the  earth,  and 
whether  it  was  mined  with  little  labor  by  skilful 
methods  or  with  great  labor  by  unskilful  methods. 
One  ton  is  for  him  as  good  as  another  of  the 
same  quality,  however  they  may  differ  in  cost  of 
production.  But  if  two  things  are  not  equally 
desirable  from  the  standpoint  of  the  average  buyer, 
they  will  differ  in  price,  even  though  they  cost  the 
same.  A  pound  of  sirloin  sells  for  more  than  a 
pound  of  shank,  though  one  costs  no  more  than 
the  other. 

Cost  of  production  is,  however,  an  effective 
check  upon  the  supply  of  any  product,  even  though 
there  be  a  wide  diversity  in  the  cost  of  its 
different  units.  No  part  of  the  supply  could  long 
be  maintained  if  it  cost  more  than  it  was  worth. 
^  This  is  market  price  as  distinguished  from  pedler's  price. 


Value  35 

Consequently,  the  most  expensive  part  of  the 
supply  can  not,  in  the  long  run,  cost  more  than 
the  price  which  it  brings.  No  one  would  continue  ^^ 
producing  an  article  under  such  unfavorable  con-«y  ^-'^ 
ditions  as  to  lose  money  on  it.  If  the  commodity^J^^^^  * 
is  one  whose  units  are  all  of  uniform  quality,  it  (U^^  ^ 
will,  as  already  pointed  out,  sell  at  a  uniform  price 
in  the  same  market;  but  that  uniform  price  must, 
in  the  long  run,  be  as  high  as  the  cost  of  the 
most  expensive  part  of  the  supply.  If  the  price 
should  fall  so  low  as  not  to  pay  the  cost  of  pro- 
ducing any  part  of  the  supply,  some  of  the  pro- 
ducers will  go  out  of  business,  and  production  will 
thereby  be  curtailed  and  the  supply  reduced.  But 
if  the  price  should  go  so  high  as  to  more  than 
pay  the  cost  of  the  most  expensive  portions  of  the 
supply,  it  would  tempt  new  producers  into  the  field, 
and  the  supply  would  thereby  be  increased.  Those 
portions  of  the  supply  which  are  produced  under 
more  favorable  conditions  and  at  a  lower  cost  will 
therefore  return  a  more  or  less  permanent  surplus 
to  their  producers.  This  profit  is  protected  by  the 
higher  necessary  cost  of  other  portions  of  the 
supply,  since  the  price  can  not  fall  below  the  cost 
of  producing  those  other  portions  without  stopping 
their  production  and  therefore  reducing  the  supply. 
What  becomes  of  this  profit  will  be  discussed  later. 


^6  The  Distribution  of  Wealth 

The  normal  result  of  the  price-making  process 
is  a  kind  of  equilibrium  ^  between  the  forces  of 
demand  and  supply.  This  equilibrium  is  reached 
when  the  price  is  just  low  enough  to  induce  buyers 
to  take  the  whole  supply,  and  yet  just  high 
enough  to  pay  the  cost  of  the  most  expensive 
portion  and  induce  the  producers  to  maintain  the 
supply.  Under  these  conditions  the  consumers 
are  willing  to  buy  the  whole  supply,  but  no  more ; 
and  the  producers  are  willing  to  furnish  the  whole 
supply,  but  no  more.  If,  for  any  accidental  reason, 
the  price  should  fall  below  this  point,  the  con- 
sumers would  want  more  of  the  commodity  than 
they  had  been  getting;  but  the  producers  would 
not  be  willing  to  furnish  so  much,  since  some  of 
them  would  be  producing  at  a  loss.  On  the 
other  hand,  if  the  price  should  rise  above  the 
equilibrium  point,  consumers  would  buy  less  of 
it  than  they  had  been  using,  but  producers  would 
be  encouraged  to  produce  more.  In  either  case 
the  market  would  become  temporarily  unbalanced 
—  in  the  first  case  because  consumers  would  want 
more  of  the  commodity  than  was  to  be  had,  and 
in  the  second  case  because  producers  would  be 
producing  more  than  they  could  sell.  But  either 
circumstance  would  tend  to  restore  the  equilibrium. 

1  Cf.  Marshall,  "  Principles  of  Economics,"  Book  V. 


Value 


37 


If  consumers  want  more  than  is  to  be  had,  they 
bid  against  one  another  and  raise  the  price.  If 
producers  offer  more  than  they  can  sell,  they  bid 
against  one  another,  in  the  absence  of  monopoly, 
and  thus  lower  the  price.  The  price  is  therefore 
constantly  seeking  the  equilibrium  point,  though, 
owing  to  the  multitudinous  disturbing  influences 
and  the  constant  changes  in  tastes  and  fashions, 
as  well  as  in  the  methods  of  production,  it  is  sel- 
dom stable.  The  water  in  a  lake  is  constantly 
seeking  a  state  of  equilibrium,  though  it  is  never 
at  rest. 

The  equilibrium  of  supply  and  demand  may  be 
further  explained  by  means  of  the  following  diagram, 
which  is  but  an  elaboration  of  the  one  on  page  19:  — 
Y 
A 


F  G  H  J 

Let  us  suppose   that   the  amount  of  a  given  com- 
modity is  measured,  as  in  the  former  diagram,  along 


38  The  Distribution  of  Wealth 

the  line  OX,  while  its  value  and  its  cost  are  measured 
along  the  Hne  OY.  The  descending  curve  ABCDE, 
which  was  called  the  utility  curve  in  the  former  dia- 
gram, is  here  called  the  demand  curve.  The  height 
of  the  various  points  on  this  curve  above  the  base  line 
OX  is  supposed  to  represent  the  price  which  vary- 
ing quantities  of  the  commodity  would  bring  on  the 
market.  Thus,  if  the  supply  were  measured  by  OGy 
the  price  would  be  measured  by  BG\  if  the  supply 
were  OH^  the  price  would  be  CH)  and  if  the  supply 
were  Q/,  the  price  would  be  DJ.  Similarly,  the 
ascending  curve  KNPCQ  is  the  cost  curve,  whose  dis- 
tance above  the  base  line  at  various  points  represents 
the  cost  of  producing  the  various  parts  of  the  supply. 
That  is  to  say,  some  parts  are  produced  at  a  cost  as 
low  as  OKy  others  at  a  cost  of  NFy  others  at  CH,  and 
if  so  much  as  OJ  were  produced,  some  of  it  would 
cost  as  much  as  QJ. 

But,  as  already  pointed  out,  the  price  at  which  so 
large  a  supply  would  have  to  sell  would  be  only  DJ, 
thus  entaiUng  a  loss  on  all  the  producers  of  that  part 
of  the  supply  represented  by  the  line  FJ.  Some  of 
these  would  certainly  go  out  of  business,  or  turn  their 
attention  to  something  else,  with  a  resulting  diminu- 
tion of  the  supply.  But  if  the  supply  should  decrease 
until  it  was  equal  only  to  the  line  OG,  the  price,  as 
already  pointed  out,  would  rise  to  the  height  of  BG. 


Value  39 

This  is  more  than  a  remunerative  price,  since  the  most 
expensive  part  of  this  diminished  supply  would  cost 
only  PG,  The  large  profits  to  be  obtained  from  an 
increased  production  would  then  tempt  new  producers 
into  the  field  (in  the  absence  of  monopoly),  or  tempt 
the  old  producers  to  increase  their  output,  with  a  re- 
sulting increase  in  the  supply  and  fall  in  price.  But 
when  the  supply  is  measured  by  the  line  OH^  the  price 
would  be  represented  by  the  line  CH^  which  would 
also  pay  the  cost  of  the  most  expensive  portion. 
These  conditions  may  be  considered  stable  except 
as  they  are  disturbed  by  new  inventions  and  other 
changes  in  the  methods  of  production,  or  by  changes 
in  taste  or  fashion  on  the  side  of  consumption.  Rul- 
ing out  such  disturbing  factors,  this  supply  can  all 
be  sold  at  a  remunerative  price,  and  yet  not  at  a 
price  which  offers  any  inducement  to  try  to  increase 
the  supply.  But  if  less  or  more  is  produced,  the 
conditions  are  necessarily  unstable.  If  less  is  pro- 
duced, the  price  will  be  greater  than  the  cost,  even 
of  the  most  expensive  part  of  the  supply,  and  this 
will  stimulate  a  larger  production.  But  if  more  is 
produced,  the  price  will  fall  below  the  cost  of  the 
most  expensive  portion  of  the  supply,  and  this  will 
drive  some  of  the  producers  out  of  the  field. 

It  is  necessary  at  once  to  forestall  a  possible  infer- 
ence from  the  above  diagram.     Though  the  different 


40  The  Distribution  of  Wealth 

parts  of  any  commodity  are  almost  invariably  pro- 
duced at  different  costs,  it  is  not  to  be  inferred  that 
the  most  expensive  portion  of  a  larger  supply  will 
necessarily  cost  more  to  produce  than  the  most 
expensive  portion  of  a  smaller  supply.  Such  an 
inference  would  probably  be  true  in  most  cases  where 
the  increase  in  the  supply  is  comparatively  small,  — 
too  small  to  admit  of  any  of  the  improvements  and 
economies  which  sometimes  accompany  large-scale 
production,  —  and  where  the  increase  in  the  supply 
can  not  be  secured  by  merely  running  the  existing 
plants  a  little  over  time.  In  such  cases  the  sHghtly 
larger  production  would  merely  bring  into  use 
a  few  less  favorable  situations  and  a  few  less 
practised  workers  than  had  formerly  been  em- 
ployed. This  would  mean  a  larger  cost  for  the 
additional  supply,  which  cost  would  be  represented 
by  the  line  CQ.  The  same  would  be  true  in  the 
cases  of  all  such  commodities  as  the  leading  agricul- 
tural products  whose  production  has  already  reached 
the  Hmits  of  the  economy  of  large-scale  production, — 
that  is,  where  there  is,  so  far  as  is  now  known, 
no  further  economy  to  be  secured  by  a  mere  enlarge- 
ment of  the  scale  of  production.  In  all  such  cases 
the  diagram  may  be  strictly  interpreted.  A  larger 
supply  of  any  such  product  requires  the  use  of  land, 
labor,  or  capital,  which  would  not  be  necessary  in  the 


Value  41 

case  of  a  smaller  supply.  Ordinarily,  only  the  better 
and  cheaper  land,  labor,  and  capital  would  be  used 
to  produce  the  smaller  supply,  whereas  inferior  or 
more  expensive  factors  would  have  to  be  called  into 
use  to  produce  the  larger  supply. 

In  the  case  of  wheat,  for  example,  there  are  three 
ways  of  increasing  the  product,  leaving  out  of  account 
possible  new  discoveries  and  inventions.  In  the 
first  place,  land  which  is  not  now  considered  fit  for 
cultivation  could  be  used.  In  the  second  place,  land 
which  is  now  considered  more  valuable  for  other  pur- 
poses could  be  devoted  to  wheat  growing.  In  the 
third  place,  land  which  is  now  being  used  for  wheat 
growing  could  be  cultivated  more  intensively  and 
made  to  yield  a  larger  crop.  But  each  of  these 
methods  is  an  expensive  one.  To  grow  wheat  on 
land  which  was  formerly  too  poor  to  cultivate  is 
obviously  expensive,  for  poor  land  means  land  which 
yields  little  in  proportion  to  the  cost  of  working  it. 
To  grow  wheat  on  land  which  was  formerly  more 
valuable  for  other  purposes  would  require  the  sacri- 
fice of  those  other  purposes.  It  would  be  expen- 
sive, to  take  an  extreme  case,  to  grow  wheat  on 
land  which  is  worth  ;^iooo  an  acre  for  market 
gardening.  Such  land  is  worth  ;Siooo  an  acre 
for  that  purpose  because  of  the  large  profit  which 
its  user  can  make  in  that  business.     To  grow  wheat 


42  The  Distribution  of  Wealth 

would  require  the  sacrifice  of  those  profits,  and 
would  not  pay  unless  wheat  rose  to  an  enormously 
high  price.  And  finally,  to  increase  the  product  by 
the  more  intensive  cultivation  of  the  land  now  used 
for  growing  wheat  would  be  expensive  for  two 
reasons.  {a)  Owing  to  the  law  of  diminishing 
returns^  the  labor  of  increasing  the  product  of  a 
given  piece  of  land  increases  more  than  in  proportion 
to  the  product,  {b)  To  cultivate  the  land  more  in- 
tensively requires  more  labor  or  capital,  which  could, 
only  be  secured  by  making  use  of  labor  or  capital 
now  considered  too  poor  to  use,  or  by  calling  it  out 
of  other  occupations  where  it  was  presumably  worth 
more. 

But  there  are  many  commodities  whose  production 
has  not  yet  been  enlarged  to  the  most  economical 
scale,  and  whose  cost  would  therefore  be  less  if  they 
could  be  produced  on  a  larger  scale.  Certain  scien- 
tific instruments,  for  example,  which  would  have 
only  a  limited  sale,  no  matter  how  cheap  they  became, 
must  necessarily  be  produced  on  a  small  scale.  Such 
articles  are  often  produced  largely  by  hand,  for  the 
reason  that  it  would  not  pay  to  construct  expensive 
machines  for  that  purpose.  Machines  can  only  be 
used  to  the  best  advantage  when  run  at  something 
like  their  full  capacity.     If  they  are  used  in  the  pro- 

1  See  Chapter  II. 


Value  43 

duction  of  articles  of  this  class,  the  cost  of  the  articles 
will  be  high  for  the  reason  that  the  cost  of  the  ma* 
chines  has  to  be  divided  among  so  few  products. 
If  there  were  a  large  market  for  such  articles,  so  that 
it  would  be  practicable  to  produce  them  on  a  large 
scale,  machines  would  be  constructed,  and  other 
economies  introduced,  which  would  greatly  cheapen 
them.  This  has  already  been  done  in  the  manufac- 
ture of  watches,  and  it  is  being  done  in  the  case  of  a 
number  of  other  articles. 

The  most  economical  scale  of  production  is  one  in 
which  the  producing  establishments  are  not  only  as 
large  as  is  consistent  with  the  highest  efficiency,  but 
where  each  one  is  run  at  something  like  its  full 
capacity.  Even  when  a  commodity  is  being  pro- 
duced in  a  series  of  estabhshments  which  are  large 
enough  to  secure  the  maximum  economy,  it  often 
happens  that  some  of  them  are  run  at  less  than  the 
most  economical  rate,  or  that  some  expensive  parts 
of  these  establishments  are  allowed  to  remain  idle  a 
considerable  part  of  the  time.  They  may  then,  by 
running  at  a  higher  rate  and  keeping  all  parts  busy, 
increase  their  output  without  a  proportional  increase 
in  their  expenses,  in  which  case  the  additional  out- 
put costs  less  per  unit  than  the  regular  output.  One 
large  element  in  the  cost  of  a  manufactured  commod- 
ity is  the  cost  of  the  plant  and  the  expense  of  keep- 


44  The  Distribution  of  Wealth 

ing  it  up.  This  cost  is  practically  as  great  when  the 
plant  is  run  only  a  part  of  the  time  as  when  it  is  run 
all  of  the  time.  The  original  cost  of  the  plant  would 
be  the  same  in  either  case,  and  it  would  deteriorate 
by  going  out  of  date  just  as  rapidly,  though  the  wear 
and  tear  would  be  a  trifle  less  when  it  was  run  at  less 
than  its  full  capacity.  When  the  output  is  small, 
the  original  cost  of  the  plant  has  to  be  divided 
among  a  smaller  number  of  units  of  product  than 
when  the  output  is  large,  which  makes  this  element 
of  cost  greater  per  unit  in  the  case  of  a  small  than 
in  the  case  of  a  large  output.  Ordinarily  the  other 
elements  in  the  cost,  such  as  labor  and  raw  materials, 
are  no  greater  per  unit  when  the  output  is  large  than 
when  it  is  small.  Of  course,  if  the  attempt  were 
made  to  crowd  the  factory  beyond  its  true  capacity,^ 
these  elements  of  the  cost  would  increase  more 
than  in  proportion  to  the  output,  which  would  make 
them  higher  per  unit  of  product.  But  up  to  this 
point  an  increase  in  the  output  reduces  the  cost  per 
unit,  since  the  cost  of  labor  and  raw  materials  and 
other  running  expenses  are  practically  the  same  per 
unit,  while  the  cost  of  the  plant  and  other  fixed 
charges  are  less  per  unit. 

Let  us  suppose  that  the  interest  on  the  cost  of  the 

1  For  a  fuller  explanation  of  the  meaning  of  its  true  capacity,  see 
Chapter  II  on  Diminishing  Returns. 


Value  45 

establishment,  plus  the  insurance,  deterioration,  and 
other  fixed  charges,  amounts  to  $i(X),C)00  annually, 
while  all  the  running  expenses,  including  wages  and 
cost  of  materials,  amount  to  ;?200,ooo  when  the 
establishment  is  turning  out  its  full  product,  which 
is,  let  us  say,  100,000  units.  The  total  expense 
would  then  be  1^300,000,  or  $3  per  unit  of  product. 
If,  however,  the  establishment  were  to  run  on  only 
half  time,  turning  out  only  50,000  units  of  product, 
its  running  expenses  would  be  cut  down  one-half, 
making  them  ;^  100,000;  but  the  fixed  charges  would 
scarcely  be  affected  at  all,  remaining  practically  at 
$100,000.  The  total  expense  of  ;^200,ooo  would 
then  have  to  be  divided  among  the  50,000  units  of 
product,  making  each  unit  cost  $4, 

When  the  production  of  any  commodity  has  not 
reached  its  most  economical  scale,  either  because 
the  producing  establishments  are  not  large  enough 
or  because  they  are  not  run  at  their  full  capacity, 
the  equiUbrium  of  demand  and  supply  is  extremely 
unstable.  If  the  existing  establishments  are  not 
large  enough  to  secure  the  maximum  efficiency,  they 
are  in  constant  danger  of  being  driven  out  of  busi- 
ness by  newer  and  larger  rivals  who  can  produce  at 
a  lower  cost  simply  because  they  are  larger.  If  the 
market  will  not  enable  all  the  existing  establishments 
to  run  at  their  full  capacity,  there  is  likely  to  ensue 


v^^ 


46  The  Distribution  of  Wealth 

a  peculiarly  fierce  and  deadly  competition,  especially 
in  those  industries  where  the  fixed  charges  form  an 
important  element  in  the  total  cost  of  production. 
In  a  case  of  this  kind,  the  establishment  which  sells 
enough  of  its  product  to  enable  it  to  run  at  some- 
thing Uke  its  full  capacity  has  an  advantage  over 
those  which  can  not,  in  that  it  can  produce  cheaper 
than  they.  This  situation  usually  results  in  a  hard 
struggle  for  the  market,  accompanied  by  price  cut- 
ting, discriminations,  and  other  less  scrupulous 
methods.  Even  those  estabUshments  which  are 
beaten  in  the  struggle  and  forced  to  produce  at  a 
higher  cost  because  they  are  forced  to  run  at  less 
than  their  most  economical  rate,  may  still  continue 
selling  at  a  loss,  since  to  stop  producing  altogether 
would  involve  a  still  greater  loss.  If  they  can  sell 
what  they  produce  at  a  price  which  will  a  little  more 
than  pay  the  running  expenses,  there  will  be  some- 
thing left  over  with  which  to  pay  part  of  the  original 
cost  of  the  plant,  whereas  to  stop  producing  alto- 
gether would  involve  the  loss  of  the  whole  original 
outlay  unless  the  plant  could  be  turned  to  some  other 
use  than  the  one  for  which  it  was  first  planned.  For 
a  commodity  whose  production  is  still  in  such  a  con- 
dition as  this,  there  can  be  no  true  equiUbrium  of 
demand  and  supply,  and  no  price  which  can  really 
be  said  to  be  normal 


Value  47 

If  the  market  demand  is  large  enough  to  enable  a 
considerable  number  of  establishments  of  the  most 
convenient  size  to  run  at  their  full  capacity,  the  situ- 
ation will  usually  adjust  itself  in  time  so  that  a  true 
equilibrium,  such  as  the  diagram  describes,  will  be 
reached.  But  if  the  market  is  necessarily  so  small 
that  only  a  few  such  establishments  can  run,  the 
tendency  is  toward  monopoly.  This  comes  about  in 
one  of  two  ways.  In  the  first  place,  the  larger  and 
more  economical  establishments  continue  undersell- 
ing and  exterminating  the  smaller  and  less  economi 
cal  ones  until,  in  process  of  time,  only  one  or  two 
large  establishments  are  left  in  possession  of  the 
field.  In  this  way  the  market  becomes  monopolized 
by  the  process  of  natural  selection.  In  the  secon 
place,  before  the  final  stage  in  this  process  i; 
reached,  the  few  who  have  so  far  survived  th 
struggle  decide  to  stop  the  process  of  natural  selec/- 
tion,  so  far  as  it  threatens  them  with  extermination, 
by  uniting  under  one  of  the  various  forms  of  what  is 
called  a  trust. 

When  the  production  of  any  commodity  has  be- 
come monopolized  by  these  or  any  other  methods,  — 
and  there  are  many  kinds  of  monopoly,  —  a  new 
factor  is  introduced  into  the  price-making  process. 
For  this  reason  monopoly  price  is  usually  treated  as 
in  a  class  by  itself.     A  monopoly,  like  any  other  indi- 


48  The  Distribution  of  Wealth 

vidual  concern,  aims  to  make  as  large  profits  as 
possible.  In  order  to  do  this  it  must  sell  at  that 
price  which  will  yield  it  the  largest  total  surplus 
above  cost  on  the  whole  amount  sold.  In  this  it 
differs  in  no  wise  from  other  concerns ;  but  there  is 
this  important  difference  in  the  conditions  under 
which  they  sell.  A  concern  which  produces  a  com- 
modity in  which  there  is  competition  has  its  price 
fixed  for  it  by  its  competitors.  That  is  to  say,  the 
price  which  will  yield  it  the  largest  total  profits  is 
practically  the  same  as  that  at  which  all  its  competi- 
tors are  selling,  which  in  turn  is  fixed  by  the  cost  of 
producing  the  most  expensive  part  of  the  normal 
supply.  If  it  should  try  to  sell  at  a  higher  price,  its 
competitors  would  get  most  of  its  customers,  and  it 
would  find  itself  doing  business  on  such  a  small  scale 
as  to  yield  small  profits.  But  the  monopolist,  on  the 
other  hand,  does  not  have  these  precise  conditions  to 
face,  since  he  has  no  competitors  to  sell  the  same 
commodity  to  his  customers  if  his  price  goes  too 
high.  Nevertheless,  there  are  producers  of  other 
commodities  who  are  trying  to  sell  their  goods,  and 
they  will  succeed  in  larger  degree  if  his  price  goes 
too  high.  That  is  to  say,  consumers  habitually  take 
considerable  latitude  in  their  choice  of  purchases, 
and  if  the  price  of  one  thing  does  not  suit  them,  they 
buy  less  of  it  and  buy  something  else  instead.     This 


Value 


49 


gives  some  elasticity  to  the  demand  for  the  monopo- 
lized commodity,  and  for  this  reason  alone  the 
monopolist  can  not  afford  to  put  his  price  too  high, 
lest  his  sales  should  be  so  reduced  as  to  net  him  a 
smaller  surplus  on  his  whole  business  than  he  could 
make  by  selling  more  goods  at  a  lower  price. 

In  addition  to  the  elasticity  of  the  demand  for  the 
monopolized  product,  there  is  the  further  fact  that 
monopoUes  are  not  always  absolute,  There  is  often 
a  small  residuum  of  competition  —  a  few  small  pro- 
ducers who  manage  to  survive  through  special  advan- 
tages or  superior  managing  ability.  These_2ut^  a 
more  or  less  effective  check  upon  the  rapacity  of  the 
monopoly,  forcing  it  to  use  a  certain  degree  of  mod- 
eration in  fixing  its  prices.  Nevertheless,  the  monop- 
olist's power  over  prices  is  substantially  greater  than 
that  of  any  individual  producer  in  a  competitive  in- 
dustry, and  he  is  thereby  frequently  enabled  to  amass 
enormous  profits.  Even  a  slight  rise  in  the  price  of 
the  product  may  greatly  increase  the  margin  of  profits. 
When  a  given  article  is  being  sold  at  a  five  per  cent 
profit,  an  increase  of  five  per  cent  in  its  price  doubles 
the  profit  on  each  unit  sold.  Unless  the  sales  are 
reduced  one-half  as  the  result  of  the  high  price,  this 
means  a  substantial  increase  in  the  total  profits. 

The  secret  of  the  monopolist's  power  over  prices 
is  found  in  his  control  over  the  supply  of  the  product. 


JO  The  Distribution  of  Wealth 

Even  he  can  not  force  his  customers  to  buy  more 
than  they  want,  and  they  will  choose  to  buy  less  and 
less  as  he  puts  the  price  higher  and  higher.  In  a 
competitive  industry,  where  there  is  no  control  over 
supply,  no  individual  producer  wishes  to  cut  down 
his  production  or  to  have  a  part  of  his  product  left 
on  his  hands.  They  will  all  therefore  try  to  produce 
as  much  as  they  can  sell  at  a  price  which  will  pay 
the  cost  of  production  with  a  reasonable  margin  of 
profit.  The  man  who  tries  to  sell  higher  will 
scarcely  be  able  to  sell  at  all.  Cost  of  production 
is  therefore,  as  has  already  been  shown,  the  factor 
which  controls  the  supply  of  the  product  of  a  com- 
petitive industry,  and,  indirectly,  its  price.  But  in 
the  case  of  a  monopoly,  it  is  the  will  of  the  monopo- 
list, calculating  on  the  largest  total  of  profits  which 
controls  the  supply. 

We  have  found  that  things  have  value  only  when 
they  are  scarce,  and  that  there  are  three  conditions 
which  make  them  scarce.  In  the  first  place,  their 
supply  may  be  absolutely  limited  by  nature  and 
incapable  of  increase  by  any  human  effort.  In  the 
second  place,  they  may  be  made  scarce  because 
men  are  not  willing  to  produce  them  beyond  the 
point  which  will  give  them  a  value  equal  to  their 
cost  of  production.  And  in  the  third  place,  the 
production  may  be  controlled  by  a  monopoly  which 


Value  5 1 

limits  the  supply  at  a  point  which  will  give  the 
product  such  a  value  as  will  yield  the  largest  sum 
total  of  profits  on  the  whole  amount  sold.  The 
theory  of  value  ought  by  this  time  to  be  reasonably 
clear  so  far  as  it  relates  to  consumable  commodities. 
A  full  understanding  of  the  value  of  goods  which 
are  used  for  purposes  of  further  production  requires 
a  further  analysis  of  the  factors  which  enter  into 
the  demand  for  them;  but  this  analysis  can  be 
made  to  better  advantage  after  we  have  made  a 
study  of  the  law  of  diminishing  returns. 

Note.  — Professor  Clark  ("Distribution  of  Wealth,"  Ch.  XVI) 
undertakes  an  ingenious  correction  of  the  marginal  utility  theory  of 
value  by  pointing  out  that  in  each  article  there  are  various  qualities, 
all  of  which  are  separately  evaluated,  and  each  of  which  has  its  mar- 
ginal purchaser  and  its  marginal  utility.  He  further  maintains  that  it 
is  not  the  marginal  utility  of  the  article  as  a  whole  which  determines 
its  value,  because  no  man  is  in  the  position  of  the  marginal  purchaser 
as  respects  all  its  qualities.  Thus  in  the  case  of  a  canoe  which  con- 
tains the  qualities  of  buoyancy,  mobility,  comfort,  speed,  and  elegance, 
no  individual  buyer  is  likely  to  estimate  each  quality  as  the  marginal 
buyer  would.  Buoyancy,  for  example,  might  be  worth  ^500  to  him  if 
he  could  not  get  it  for  less,  but  there  are  so  many  things  which  can 
furnish  buoyancy  that  the  marginal  utility  of  that  quality  to  the  com- 
munity is  only  $2,  and  he  can  get  it  for  that.  He  might  value  mobility 
at  $300,  but  the  supply  of  that  quality  makes  its  marginal  utility  and 
its  price  $5.  For  comfort  he  would  pay  $icx),  but  he  can  get  it  for  ;gio. 
Speed  he  would  value  at  $75,  but  he  can  get  it  for  $2^,  and  for  ele- 
gance he  gives  $30,  being  the  marginal  purchaser  as  respects  that 
quality.  Altogether  he  gives  $^2  for  the  canoe,  which  would  have 
been  worth  more  than  ^1000  to  him  if  he  could  not  have  got  it  for 
less,  and  yet  he  was  the  marginal  purchaser  of  one  of  its  qualities. 


52  The  Distribution  of  Wealth 

It  is  doubtless  true  that  such  an  analysis  can  be  made  of  the  aver- 
age buyer's  desire  for  an  article,  but  that  it  is  an  important  contribution 
to  the  theory  of  value  cannot  be  admitted.  It  overlooks  the  fact  that 
value  is  only  power  in  exchange,  and  that  the  vakie  of  the  canoe  is 
only  the  number  of  other  things  for  which  it  will  exchange.  When 
we  consider  that  the  buyer's  desire  for  each  of  the  other  things  which 
he  gives  up  in  exchange  for  the  canoe  can  be  similarly  analyzed,  it 
appears  that  he  may  not  have  realized  so  much  surplus  advantage  over 
the  cost  of  the  canoe  as  the  illustration  seemed  to  make  out.  His 
desire  for  a  bicycle,  for  example,  may  be  analyzed  into  as  many  parts 
as  his  desire  for  a  canoe,  and  by  the  same  method  it  might  be  shown 
to  be  worth  little  less  than  ^looo  to  him.  Then  if  he  swaps  a  bicycle 
for  a  canoe  he  will  be  making  no  such  gain  as  was  assumed.  Even 
when  he  pays  money  for  the  canoe  he  is  giving  up  the  chance  of  buy- 
ing a  bicycle  or  something  else  which  he  might  otherwise  have,  and 
the  same  objection  would  apply  to  Professor  Clark's  contention. 

As  a  matter  of  fact  there  is  a  marginal  buyer  for  each  class  of  canoes 
—  some  one  to  whom  a  canoe  of  that  class  is  just  worth  buying  —  at  any 
given  price.  If  the  price  of  the  whole  canoe  is  high,  there  will  be  few 
buyers  ;  but  if  it  is  low,  there  will  be  many  buyers.  If  there  is  a  large 
number  to  be  sold,  the  price  must  be  put  low  enough  to  tempt  a  large 
number  of  buyers.  Such  staple  commodities  as  wheat  and  coal  are 
physically  separated  into  classes  and  grades,  and  prices  are  quoted  only 
for  grades  or  classes.  In  the  case  of  canoes  and  bicycles  and  similar 
articles,  no  such  physical  classification  is  made,  but  we  must  neverthe- 
less make  some  sort  of  logical  classification  before  we  can  accurately 
explain  the  price-making  process. 

COLLATERAL  READING 

W.  S.  Jevons,  Theory  of  Political  Economy,  Chapters  II-IV. 

J.  B.  Clark,  The  Philosophy  of  Wealth,  Chapter  V. 

Alfred  Marshall,  Principles  of  Economics,  4th  Ed.  Books 

III  and  V. 
E.  BtiHM-BAWERK,  Positive  Theory  of  Capital,  Book  III. 


CHAPTER   II 

DIMINISHING  RETURNS 

Ask  any  farmer  you  may  happen  to  meet  about 
the  quality  of  his  land,  and  unless  his  is  an  exceptional 
farm,  he  will  tell  you  that  it  is  not  all  alike,  —  that 
one  field  is  more  productive  than  the  rest  and  will 
yield  a  larger  or  more  valuable  crop  in  proportion 
to  the  labor  and  capital  expended  in  its  cultivation. 
But  if  you  were  to  advise  him  for  that  reason  to 
put  all  his  labor  and  capital  on  the  superior  field, 
letting  the  rest  of  his  farm  go  to  waste,  he  would 
certainly  not  take  your  advice,  and  he  would  think 
very  poorly  of  your  intelligence  besides.  Yet  if 
one  knew  absolutely  nothing  about  farming,  and 
were  possessed  of  the  temerity  which  sometimes 
accompanies  such  ignorance,  one  might  argue  the 
matter  with  the  farmer,  reasoning  somewhat  as  fol- 
lows :  if  a  certain  amount  of  labor  and  capital  on 
the  more  productive  field  will  produce  a  more  valu- 
able crop  than  the  same  amount  will  produce  if 
expended  on  a  less  productive  field,  it  is  a  mistake 
to  waste  any  labor  and  capital  on  the  poorer  land. 

53 


54  The  Distribution  of  Wealth 

If,  for  example,  one  hundred  days'  labor  (with  the 
appropriate  tools)  on  the  best  field  will  produce  a 
crop  worth  $Soo,  while  the  same  amount  of  labor 
on  any  other  part  of  the  farm  will  produce  a  crop 
worth  only  $400,  the  farmer  has  only  1^900  for  his 
two  hundred  days'  labor.  But  if  one  hundred  days' 
labor  on  the  best  field  will  produce  a  crop  worth 
$500,  two  hundred  days'  labor  on  the  same  field 
ought  to  produce  twice  as  big  a  crop,  one  worth 
$1000.  Therefore  the  farmer  loses  jJiCK)  by  putting 
half  his  labor  on  his  inferior  land. 

If  it  were  true  that  the  second  hundred  days*  labor 
on  the  best  field  would  produce  as  much  as  the  first 
hundred,  or,  to  put  it  more  accurately,  if  two  hun- 
dred days'  labor  on  that  field  would  produce  twice  as 
much  as  one  hundred,  and  three  hundred  days'  labor 
three  times  as  much,  and  so  on  indefinitely,  the  argu- 
ment would  be  unanswerable,  and  the  farmer  would 
be  very  foolish  not  to  follow  your  advice.  More- 
over, the  community  at  large  would  be  acting  very 
unwisely  in  not  concentrating  all  its  energies  upon  a 
relatively  small  area  of  its  best  land.  But  the  farmer 
knows  perfectly  well,  and  so  does  the  community  at 
large,  that  such  is  not  the  case,  —  that  the  produce  of 
a  given  piece  of  land  can  not  be  doubled,  trebled, 
quadrupled,  and  so  on  indefinitely  by  merely  doub- 
ling, trebling,  and  quadrupling  the  amount  of  labor 


Diminishing  Returns  55 

and  capital  expended  in  its  cultivation.  In  the  case 
already  assumed  it  is  more  probable  that  although 
one  hundred  days'  labor  would  produce  a  crop  worth 
$SQOy  two  hundred  days  on  the  same  field  would  pro- 
duce a  crop  worth  only  ;^8oo.  In  that  case  it  would 
pay  better  by  $100,  under  the  conditions  assumed, 
to  put  the  second  hundred  days'  labor  on  some  other 
part  of  the  farm.  It  is  because  the  farmer,  who  is  in 
the  best  position  to  judge,  knows  that  such  condi- 
tions are  real  that  he  does  not  concentrate  all  his 
energies  on  the  small  fraction  of  his  farm  which 
includes  only  his  best  land. 

To  say  that  the  farmer  knows  better  than  to  con- 
centrate all  his  energies  on  his  best  land  is  the  same 
as  saying  that  he  knows  and  acts  upon  one  of  the 
fundamental  laws  of  economics,  viz.,  the  law  of  dimin- 
ishing returns,  though  like  the  Bourgeois  Gentil- 
homme  who  was  astonished  to  find  that  he  had  been 
talking  prose  all  his  life,  our  farmer  might  be  sur- 
prised to  learn  that  he  was  acting  upon  an  economic 
law.  This  law  of  diminishing  returns  is  simply  a  part 
of  the  general  observation  that  the  product  of  any 
given  piece  of  land  does  not,  even  under  the  same 
conditions  of  soil  and  season,  bear  a  constant  ratio  to 
the  amount  of  labor  and  capital  used  in  producing  it. 
That  is  to  say,  the  product  does  not  vary  in  the  same 
proportion  as  the  labor  and   capital,  increasing  in 


56  The  Distribution  of  Wealth 

proportion  as  they  increase,  and  decreasing  in  pro- 
portion as  they  decrease.  This  simply  means  that 
there  are  several  factors  in  the  production  of  any 
crop,  including  labor,  capital,  and  land,  and  that  the 
amount  of  the  crop  is  not  determined  by  any  one  or 
any  two  of  these  factors,  but  by  all  of  them  com- 
bined. Labor  and  capital,  being  only  a  part  of  the 
factors,  cannot  alone  determine  the  crop.  It  is  well 
known  to  practical  men  that  a  niggardly  application 
of  labor  and  capital  to  a  piece  of  land  in  the  cultiva- 
tion of  any  crop  is  little  better  than  wasted,  because 
it  will  produce  so  little  in  proportion  to  itself ;  where- 
as a  more  generous  application  will  yield  a  crop  not 
only  larger,  but  larger  in  proportion  to  the  amount 
of  labor  and  capital  employed.  Up  to  this  point  the 
land  is  said  to  yield  increasing  returns  to  the  labor 
and  capital  employed  in  its  cultivation.  But  if  the 
amount  of  these  factors  used  in  cultivating  a  given 
piece  of  land  is  still  further  increased,  a  point  will 
eventually  be  reached  where  the  product  will  no 
longer  increase  as  fast  as  these  factors  are  increased. 
Beyond  this  point  the  land  is  said  to  yield  dimin- 
ishing returns  to  the  labor  and  capital  employed. 
Though  larger  appUcations  of  labor  and  capital  may 
continue  to  produce  larger  crops,  the  crops  will  not 
be  so  large  in  proportion  to  the  labor  and  capital. 
In  growing  such  a  specific  crop  as  corn,  for  ex- 


Diminishing  Returns  57 

ample,  a  single  day's  labor  of  a  man  and  team  with 
the  appropriate  tools,  if  spread  over  a  whole  ten-acre 
field,  would  be  thrown  away  because  it  would  pro- 
duce no  crop  at  all.  Five  days  on  the  same  field 
might  produce  something  of  a  crop,  but  it  would  be  a 
poor  one.  Ten  days  would  certainly  produce  more 
than  twice  as  large  a  crop  as  5,  and  20  days'  labor 
might  possibly  produce  more  than  twice  as  much 
as  10.  But  40  days'  labor  would  hardly  produce 
twice  as  much  as  20,  80  would  certainly  not  pro- 
duce four  times  as  much,  and  200  days'  labor 
would  fall  far  short  of  producing  ten  times  as  much. 
If  these  assumptions  are  true  of  the  particular  field 
in  question,  it  could  be  said  to  yield  increasing  re- 
turns up  to  the  point  where  20  days'  labor  were 
expended.  Beyond  that  point  it  would  be  said  to 
yield  diminishing  returns. 

This  may  be  further  illustrated  by  means  of 
Table  A,  which  purports  to  show,  in  an  assumed 
case,  how  much  corn  could  be  produced  on  a  ten-acre 
field  by  using  different  amounts  of  labor  and  capital, 
the  amounts  being  expressed  in  terms  of  days'  labor 
of  a  man  and  team  with  the  appropriate  tools.  The 
ratio  between  the  product  on  the  one  hand  and  the 
labor  and  capital  on  the  other  is  shown  in  the  last 
column,  which  gives  the  amount  of  product,  or  the 
number  of  bushels  produced,  per  day's  labor. 


/■ 


58 


The  Distribution  of  Wealth 


TABLE   A 


Days'  labor  of  man  and 
team  with  tools 

Total  crop  in  bushels 

Bushels  per  day's  labor 

I 

0 

01 

5 

IQ 
15 

50 

ISO 
270 

10 
18 

Increasing 
returns. 

20 

380 

19 

25 

450 

18 

* 

30 

35 
40 

510 
560 
600 

17 
16 

15 

Diminishing 
returns. 

45 

630 

14 

50 

650 

13  J 

According  to  this  table,  as  will  be  seen,  increasing 
returns  stop,  and  diminishing  returns  begin  at  the 
point  where  20  days'  labor  are  expended  in  the 
cultivation  of  the  field. 

TABLE  B 


Days'  labor  of  man  and 
team  with  tools 

Total  crop  in  bushels 

Bushels  per  day's  labor 

I 

0 

0 

5 

40 

8 

Increasing 

10 

130 

13 

returns. 

15 

240 

16      J 

20 

300 

^5 

25 

350 

14 

30 

390 

13 

Diminishing 

35 

420 

12 

returns. 

40 

440 

II 

45 

450 

10 

SO 

455 

91 

Diminishing 

Returns 

5 

TABLE 

C 

Based  on 

Tables  A  and  B 

Field  A 

Field  B 

Total 

Days 

Bushels    Days 

Bushels    Days 

Bushel! 

lo  producing 

;  150+10  producing  130=  20  producing 

;  280 

15 

« 

270+    5 

11 

40  =  20 

a 

310 

20  , 

tc 

380+   0 

It 

0=  20 

It 

380 

15 

u 

270  +  10 

u 

130  =  25 

tt 

400 

20 

it 

380+    5 

u 

40  =  25 

it 

420 

25 

u 

450+   0 

a 

0  =  25 

it 

450 

IS 

a 

270  +  15 

It 

240  =  30 

<t 

iI2 

20 

u 

380  +  10 

it 

130  =  30 

it 

ii2 

25 

u 

450+    5 

It 

40  =  30 

tt 

480 

30 

a 

510+  0 

ti 

0  =  30 

tt 

510 

20 

u 

380  +  15 

it 

240=35 

u 

620 

25 

u 

450  +  10 

ti 

130  =  35 

tt 

580 

30 

it 

510+   5 

it 

40  =  35 

it 

560 

35 

u 

560+0 

it 

0  =  35 

tt 

560 

20 

u 

380  +  20 

it 

300-40 

tt 

620 

25 

u 

450+15 

it 

240  =  40 

tt 

622 

30 

u 

510+  10 

tt 

130  =  40 

it 

640 

35 

ti 

560+    5 

it 

40  =  40 

il 

600 

40 

u 

600+  0 

tt 

0  =  40 

ti 

600 

20 

u 

380  +  30 

tt 

390-50 

u 

770 

25 

it 

450  +  25 

tt 

350  =  50 

it 

800 

30 

u 

510  +  20 

tt 

300  =  50 

tt 

810 

35 

it 

560+15 

a 

240  =  50 

it 

800 

40 

il 

600  +  10 

it 

130  =  50 

ti 

730 

30 

u 

510  +  30 

n 

390  =  60 

it 

900 

35 

u 

560  +  25 

it 

350  =  60 

tt 

910 

40 

il 

600  +  20 

a 

300  =  60 

il 

900 

45 

il 

630+  15 

a 

240  =  60 

u 

870 

S: 


The  Distribution  of  Wealth 
r  TABLE   C— Continued 


Field  A  Field  B  Total 


Days  Bushels    Days  Bushels    Days  Bushels 

35  producing  560  +  35  producing  420  =  70  producing  980 
40  "         600  +  30  "         390  =  70  "         922 

45  "         630  +  25  "         350  =  70  "         980 

50  "         650  +  20  "         300  =  70  "         950 


In  any  real  case  it  would  be  impossible  to  tell, 
without  putting  it  to  a  test,  just  at  what  point 
diminishing  returns  begin,  though  a  capable  farmer 
can  tell,  on  the  basis  of  his  experience,  closely 
enough  for  practical  purposes.  Whenever  you  find 
a  competent  farmer  deliberately  devoting  a  part  of 
his  labor  and  capital  to  the  growing  of  any  crop  on 
more  than  one  grade  of  land,  you  may  be  sure  that 
he  thinks  it  pays  better  to  do  so  than  to  concentrate 
all  his  energies  on  his  best  land.  But  this  could  not 
possibly  be  true  unless  he  had  such  an  amount  of 
these  factors  as  would,  if  applied  exclusively  to  his 
best  land,  carry  its  cultivation  beyond  the  point 
of  diminishing  returns.  If  we  may  assume,  for  ex- 
ample, that  Table  A  represents  the  amount  of  corn 
produced  by  varying  amounts  of  labor  and  capital 
when  applied  to  his  best  ten-acre  field,  and  Table  B 
the  same  for  his  second  best  ten-acre  field,  we  shall 
find,  by  comparing  the  two  tables,  that  if  he  had 
only  20  days'  labor  to  use  he  would  get  more  bushels 


Diminishing  Returns  6i 

by  concentrating  them  all  on  the  best  field  than  by 
dividing  them  between  the  two  fields.  Again,  as 
shown  in  Table  C,  which  is  based  on  a  comparison 
of  Tables  A  and  B,  if  he  had  only  25  days'  labor 
at  his  disposal,  there  is  no  way  in  which  he  could 
divide  them  between  the  two  fields  so  as  to  pro- 
duce as  many  bushels  as  he  could  by  putting  them 
all  on  the  best  field.  By  this  means  he  would  get 
450  bushels,  whereas  20  days  on  field  A  and  5  on 
field  B  would  give  him  only  420  bushels,  while  15 
days  on  field  A  and  10  on  field  B  would  give  him 
only  400.  However,  when  he  has  30  days'  labor  at 
his  disposal,  it  becomes  a  matter  of  indifference 
whether  he  concentrates  them  all  on  field  A  or 
divides  them  in  the  ratio  of  15  to  15,  or  20  on  field 
A  to  ro  on  field  B,  since  each  of  the  three  methods 
would  produce  the  same  number  of  bushels,  viz., 
510.  It  is  only  when  he  has  as  many  as  35  days' 
labor  to  use  that  it  becomes  positively  to  his  ad- 
vantage to  divide  them  between  the  two  fields. 
In  this  case  the  maximum  number  of  bushels,  viz., 
620,  is  produced  by  dividing  his  days  in  the  ratio 
of  20  in  field  A  to  15  in  field  B.  Having  40  days' 
labor,  his  maximum  return,  viz.,  690  bushels,  is 
secured  by  spending  25  days  in  field  A  and  15  in 
field  B.  Fifty  days  could  be  most  profitably  divided 
in  the  proportion  of  30  on  field  A  to  20  on  field  B, 


62  The  Distribution  of  Wealth 

60  in  the  proportion  of  35  to  25,  and  70  in  the  pro- 
portion of  40  to  30. 

To  the  objection  that  these  tables  are  artificial  and 
based  on  assumed  cases,  it  is  only  necessary  to  reply 
that  the  productivity  of  any  real  field,  under  varying 
expenditures  of  labor  and  capital,  would  necessarily 
conform  to  some  table,  and  if  that  table  revealed  the 
principle  of  increasing  and  diminishing  returns  at 
all,  everything  which  has  been  said  of  Tables  A  and 
B  could  be  repeated  regarding  it.  If  it  revealed 
indefinitely  increasing  returns,  then  it  would  be  de- 
monstrably uneconomical  to  use  any  field  which  is 
inferior  to  the  one  in  question.  It  would  be  better 
to  put  all  one's  labor  and  capital  on  this  field, 
allowing  inferior  fields  to  go  to  waste. 

An  analysis  of  these  or  any  other  tables  which 
fairly  represent  the  relative  productivity  of  different 
I  pieces  of  land  amounts  to  a  demonstration  of  the 
rule  that,  in  the  growing  of  any  particular  crop,  it 
can  never  be  profitable  to  cultivate  one's  second  best 
land  unless  one  has  such  an  amount  of  labor  and 
capital  as  would,  if  used  exclusively  upon  one's  best 
land,  carry  its  cultivation  beyond  the  point  of  dimin- 
ishing returns.  This  is,  of  course,  equivalent  to 
saying  that  if  there  were  no  such  law  as  that  of 
diminishing  returns,  it  would  never  pay  a  farmer  to 
devote   any  but  a  small  area  of  his  very  best  land 


Diminishing  Returns  6^ 

to  the  growing  of  any  particular  crop,  putting  all 
his^  labor  and  capital  on  that  land.  If  any  doubt 
remains  upon  this  point,  it  may  be  effectively  re- 
moved by  constructing  tables  for  two  fields  of  differ- 
ent degrees  of  productivity,  showing  either  constant 
or  indefinitely  increasing  returns  for  each,  and  then 
trying  to  find  some  way  of  dividing  any  conceivable 
amount  of  labor  and  capital  between  the  two  fields 
so  as  to  produce  as  much  as  could  be  produced  by 
concentrating  it  all  on  the  better  field.  If  any  final 
and  conclusive  proof  of  the  law  of  diminishing  re- 
turns were  needed,  it  would  be  found  in  the  fact 
that  men  of  experience  universally  find  it  to  their 
advantage  to  utilize  lands  of  varying  degrees  of 
productivity  in  the  cultivation  of  every  crop.  How- 
ever, the  law  is  so  well  known  and  generally  recog- 
nized that  such  proof  would  not  be  needed,  had  not 
certain  writers  seen  fit  to  deny  it  because  it  did  not 
harmonize  with  their  views  of  economics,  and  certain 
would-be  reformers  to  ignore  it  because  its  recog- 
nition would  interfere  with  the  acceptance  of  their 
reforms. 

This  law  of  diminishing  returns  applies  not  only 
to  agriculture,  but  to  manufacturing  and  other 
industries  as  well,  though  there  is  a  widespread 
opinion  to  the  contrary.  It  must  be  remembered 
that  the  law  of  diminishing  returns  relates   to   the 


64  The  Distribution  of  Wealth 

amount  which  can  be  produced  on  a  given  piece  of 
land  by  varying  amounts  of  labor  and  capital.  It 
means  simply  that,  after  a  certain  point,  the  amount 
that  can  be  produced  on  any  given  piece  of  land 
does  not  increase  in  proportion  to  the  labor  and 
capital  used.  Obviously  the  same  proposition  holds 
true  of  manufacturing,  though  the  point  at  which 
diminishing  returns  begin  is  somewhat  further  re- 
moved. That  is  to  say,  in  the  manufacturing  of 
almost  any  article,  more  labor  and  capital  could  be 
concentrated  upon  a  given  piece  of  land  before  the 
law  of  diminishing  returns  begins  to  be  encountered 
than  could  be  used  on  the  same  land  in  the  growing 
of  most  agricultural  crops.  But  different  crops  per- 
mit of  widely  different  applications  of  labor  and 
capital,  some  of  them  being  grown  under  such 
intensive  systems  of  culture,  where  so  much  labor 
and  capital  are  concentrated  on  such  small  areas  of 
land  as  to  bring  them,  in  this  respect,  very  near  to 
certain  classes  of  manufactures,  for  manufactures 
themselves  vary  in  this  respect. 

In  discussions  of  this  subject,  confusion  has  some- 
times resulted  from  a  failure  to  distinguish  the  law 
of  diminishing  returns  from  a  somewhat  similar  law 
relating  to  the  comparative  economy  of  large  and 
small  scale  production.  It  is,  for  example,  some- 
times stated  that  manufacturing  is  carried  on  under 


Diminishing  Returns  65 

the  law  of  increasing  returns,  because  a  large  fac- 
tory can  be  run  more  economically,  and  turn  out 
its  products  at  a  lower  cost,  than  can  a  small  one. 
But  this  is  quite  different  from  saying  that  a  large 
factory  can  be  run  more  economically  than  a  small 
one  on  a  given  piece  of  land,  or  that  it  would  not  be 
necessary  to  use  more  land  in  connection  with  a 
large  factory  than  with  a  small  one  of  the  same 
kind.i 

Each  business  or  industrial  unit,  such  as  a  farm, 
a  store,  or  a  factory,  is  a  combination,  under  one 
management,  of  various  factors  of  production  which 
are  usually  included  under  the  three  heads,  —  laqd, 
labor,  and  capital.  Among  the  various  questions 
which  the  manager  of  such  a  unit  has  to  determine    ^ 

t^  are  the  two  following :  i.  What  is  the  h^^t  proportion  "l^ 
in  which  to  combine  the  various  factors  ?     2.  What^/ 

^  is  the  best  size  for  the  whole  business  unit  ?  The. 
law  of  diminishing  returns  has  to  do  only  with  the 
former  of  these  questions.  That  is  to  say,  it  relates 
to  the  varying  productivity  of  an  industrial  unit 
when  the  factors  are  combined  in  varying  propor- 
tions. On  the  other  hand,  the  law  which  relates  to 
the  comparative  economy  of  large  and  small  scale 
production  has  to  do  primarily  with  the  size  of  the 

1  Cf.  C.  J.  Bullock  on  "  The  Variation  of  Productive  Forces,"  Quar- 
terly Journal  of  Economics^  August,  190a. 
F  ^^ 


66 


The  Distribution  of  Wealth 


unit  rather  than  the  proportion  in  which  the  factors 
are  combined. 

The  difference  between  these  two  laws  can  be 
expressed  in  a  more  compact  form  by  means  of  the 
following  formulae,  which  are  not  to  be  understood 
as  in  any  sense  proving  the  existence  of  the  laws, 
but  only  as  expressing  them  in  convenient  form. 


<"  fci  3 


I.   If 


X    with     Y    will  produce 
II.  Then    X    with   aY  will  produce 

III.  And     aX  with   aY  will  produce 


more  than  aP  (Increasing 

returns.) 

less  than   aP  (Diminishing 

returns.) 

((Increasing 
economy  of 
large-scale 
production.) 
((Diminishing 
economy  of 
large-scale 
production.) 


less  than  aP 


It  is  assumed  that  «  is  a  positive  quantity  greater 
than  I. 

In  formula  II  it  will  be  observed,  thQ  proportion  in 
which  the  factors  are  combined  is  not  the  same  as  in 
formula  I,  land  remaining  the  same  while  labor  and 
capital  are  increased  by  a.  In  formula  III,  however, 
the  proportion  is  the  same  as  in  I,  all  the  factors 
being  increased  in  the  same  proportion  ;  but  the  size 
of  the  whole  combination  is  increased. 


Diminishing  Returns  67 

For  the  present  we  are  concerned  only  with  the 
law  of  diminishing  returns,  whose  expression  is ;  — 

®  °  «-a  a  - 

I.  If        JC     with       Y     will  produce .    .    .    .    P, 
2.  then       A     with     a  Y    will  produce  more  than  P,  but  less  than  aP. 

This,  as  was  shown  in  the  earlier  part  of  this  chapter, 
is  the  condition  which  exists  wherever  men  find  it  to 
their  advantage  to  extend  their  cultivation  to  any  but 
their  best  land. 

Leaving  out  of  account  the  increasing  or  decreas- 
ing economy  of  large-scale  production,  we  may  add 
the  following :  — 


h 


0I- 


3.  aX  with  aY  will  produce  aP;  since  this  reproduces  the  same 
proportion  between  labor  and  capital  on  the  one  hand  and  land  on  the 
other  as  was  given  in  formula  i.  Comparing  2  and  3,  it  is  evident  that, 
labor  and  capital  remaining  fixed,  a  variation  in  the  land  expressed  by  the 
ratio  aX :  X,  will  produce  a  variation  in  the  product  expressed  by  the  ratio 
aP  :  a  quantity  greater  than  P  but  less  than  aP, 

It  appears  that  the  product  does  not  bear  a 
constant  ratio  either  to  the  labor  and  capital,  or  to  the 
land.  When  the  amount  of  land  is  left  unchanged 
and  the  amount  of  labor  and  capital  is  increased,  the 
product  does  not  remain  unchanged,  nor  does  it  in- 
crease as  much  as  the  labor  and  capital.  'And  if  the 
amount  of  labor  and  capital  were  to  remain  unchanged 


68  The  Distribution  of  Wealth 

while  the  amount  of  land  were  increased,  the  product 
would  neither  remain  unchanged,  nor  would  it  in- 
crease so  much  as  the  land.  From  the  above  formula 
we  may  therefore  derive  the  following :  — 


ll 

II! 

If 

X 

with      Y 

then 

aX 

with      Y 

will  produce     .    .    ,    P, 
IV.    then     aX     with      Y     will  produce  more  than  P,  but  less  than  aP. 

Thus  the  law  of  diminishing  returns,  originally 
applied  to  the  product  of  a  given  amount  of  land 
under  varying  applications  of  labor  and  capital,  is 
capable  of  being  reversed  and  applied  to  the  product 
of  a  given  amount  of  labor  and  capital  when  applied 
to  varying  amounts  of  land.  The  principle  is  the 
same,  and  the  expression  is  similar  in  both  cases. 

This  can  be  reduced  to  arithmetical  terms  by  re- 
ferring to  the  table  for  field  A  on  page  58.  Accord- 
ing to  that  table,  when  the  amount  of  labor  and 
capital  was  increased  from  20  to  25  days,  the 
product  was  increased  from  380  to  450  bushels.  An 
increase  of  one-fourth  in  the  number  of  days  brought 
an  increase  of  something  less  than  one-fifth  in  the 
number  of  bushels.  But  if  we  were  now  to  keep 
the  amount  of  labor  and  capital  constant  at  25 
days  and  increase  the  amount  of  land  by  one-fourth, 
making  I2|  acres,  we  should  probably  get  a  product 
of  something  like  475  bushels.     If  we  leave  out  of 


Diminishing  Returns  69 

account  the  increasing  or  decreasing  economy  of 
large-scale  production,  as  we  might  reasonably  do  if 
the  variations  were  sufficiently  small,  25  days  on  12^ 
acres  would  produce  as  much  per  acre  as  20  days  on 
10  acres,  since  there  would  be  the  same  amount  of 
labor  and  capital  per  acre  in  both  cases.  But  \2\ 
acres  at  38  bushels  per  acre  (the  amount  produced  on 
each  acre  when  20  days  were  spent  on  10  acres) 
gives  a  total  product  of  exactly  475  bushels.  We 
find  therefore  that  whereas  25  days  on  10  acres 
produced  450  bushels,  the  same  number  of  days  on 
I2|  acres  would  produce  475  bushels.  In  other 
words,  an  increase  of  one-fourth  in  the  number  of 
acres  would  bring  an  increase  of  only  one-eighteenth 
in  the  number  of  bushels. 

When     10         with     25     would  produce         450, 
then      li  X  10     with     25     would  produce      i  A  X  450. 

But  the  principle  can  be  still  further  extended  by 
separating  labor  and  capital  and  representing  them 
as  two  factors,  instead  of  lumping  them  together,  as 
has  been  done  thus  far  in  the  discussion.  Indeed, 
there  is  every  reason  for  so  separating  them,  for 
labor  and  capital  do  not  belong  in  the  same  class. 
They  are  no  more  alike  than  are  labor  and  land,  or 
capital   and   land.     Moreover,    if   it  is   true  that  an 


70  The  Distribution  of  Wealth 

increase  in  the  amount  of  labor  and  capital  on  the 
same  amount  of  land  will  not  increase  the  product  as 
much  as  the  labor  and  capital  are  increased,  it  is 
equally  true,  and  for  the  same  reasons,  that  an  in- 
crease in  the  amount  of  labor  on  a  fixed  amount  of 
land  and  capital,  or  an  increase  in  the  amount  of 
capital  used  with  a  fixed  amourir~6f  land  and  labor, 
will  not  increase  the  product  as  much  as  the  variable 
factor  in  either  case  is  increased.  The  statement  can 
therefore  be  enlarged  by  adding  the  following  for- 
mulae to  those  given  above :  — 

js_,       2  s       -.S  4 

s|      -s^      •«§.  8 

<M      ^s     ^n  ft 

V.  If        X  with    Y  with  ^  will  produce  .    .    .    .    P, 
VI.  then  JC  with  a  Y  with    Z  will  produce  more  than  P,  but  less  than  aP, 
VII.  and    X  with    Y  with  aZ  will  produce  more  than  P,  but  less  than  aP, 

Formula  VI  is  an  expression  of  the  conditions 
which  exist  when  an  estabHshment,  comprising  a 
given  amount  of  land  and  capital,  is,  operated  by 
varying  amounts  of  labor.  If  the  plant  is  under- 
manned, the  product  may  be  very  small  in  proportion 
to  the  labor  employed,  whereas  a  larger  amount  of 
labor,  being  able  to  run  the  plant  efficiently,  might 
produce  a  more  than  proportionally  increased  prod- 
uct. But  a  point  is  soon  reached  at  which  the  plant 
yields  its  maximum  per  unit  of  labor.  This  is  where 
every   laborer  is   most  actively  employed,  with  the 


Diminishing  Returns  71 

largest  amount  of  machinery  at  his  disposal  which  he 
is  capable  of  handling.  But  the  purpose  of  the  man- 
agement of  such  an  establishment  is  not  to  get  the 
largest  product  per  unit  of  labor,  but  the  largest 
product  in  proportion  to  the  total  cost  of  operation. 
This  purpose  is  not  fulfilled  by  merely  working  the 
plant  at  that  rate  which  will  yield  the  largest  returns  ' 
in  proportion  to  the  labor,  unless  the  cost  of  labor  is 
the  only  item  of  expense  in  the  running  of  the 
establishment. 

This  may  be  further  explained  by  referring  again 
to  the  table  on  page  58.  If  an  indefinite  amount  of 
land  of  the  grade  of  that  ten-acre  field  could  be  had 
absolutely  free  of  cost,  it  would  then  pay  the  farmer 
to  spread  his  labor  over  as  much  land  as  would 
enable  him  to  put  twenty  days  on  each  ten  acres, 
since  this  is  the  proportion  which,  according  to  the 
table,  yields  him  the  largest  product  per  day.  Labor 
being  the  only  item  of  expense,  this  ratio  would  also 
give  him  the  largest  product  in  proportion  to  the  total 
expense  of  his  farming.  But  if  he  had  to  pay  a  rent 
per  acre  equal  to  the  price  of  20  bushels  of  corn, 
he  would  then  find  it  to  his  advantage  to  use  less 
land,  putting  30  days,  instead  of  20,  on  each  10 
acres.  If  we  may  assume  that  rent  and  wages  are  the 
only  items  of  expense,  we  will  find  that,  according  to 
the  table,   if  he  uses  only  20  days  on  each  10  acres 


72  The  Distribution  of  Wealth 

he    will    have   left,  after   paying   his  rent,  only   g 
bushels  for  each   day's  labor,  whereas  if  he  were 
to  use  30  days  on  each  10  acres,  he  would  have  left 
'^^    '-nshels  per  day.     Under  these  i^^ditions,  this 
ratio  of  labor  to  land  which  \^30riild  yield  the 
t.  product*  in  proportion  to  the  tctel  expenses, 
other  hand,  if  we  could  con(S^Ve  of  a  con- 
where   rent  would   be  the  onfy  item  of   ex- 
'^-^'^'S'  to  the  farmer,   labor    b^ing  ,abs61utely  free 
5nd  unlimited   in   quantity,  it  would-^then   pay  him 
Sttt>j^se  as  much  labor  with  eaqli^racre  as  w<jiuld 
jnaximum  crop  per  acre.  ^^UQe  the  tot.il 
.Ciise\of^^arming  would  then  consist  16  rent,  mis 
stern  Amrming  would  yield  the  maximum  pic'  ict 
1  propoi^n  to  the  total  expense.  .,^ 
We  must  conclude,  therefore,  that  if  landv\;i<:  free 
and  labor  expensive,  it  would  be  to 

combine  them  in  that  proportion  whJoh"<|||^ld  yield 
the  largest  product  per  unit  of  labor,  wiii'%  would 
require  an  extensive  system  of  faming  '  >ri  the 
other  hand,  if  labor  were  free  and  land  cii-nsive, 
the  most  profitable  combination  would  be  the  one 
which  would  yield  the  largest  product  per  unit  of 
land,  which  would  require  very  intensive  farming. 
Where  both  land  and  labor  are  expensive,  thfe  most 
profitable  proportion  must  lie  somewhere  between 
these  two  extremes,   depending  upon    the  relative 


Diminishing  Returns  73 

expensiveness  of  the  two   factors.     That  is  to   say^ 
where  land  is  dear  and  labor  cheap,  the  tendency  is  I 
toward  intensive  cultivation ;  but  where  labor  is  dear!  , 
and  land   cheap,  the  tendency  is,  for  equally  good!      ^^ 
reasons,  toward  extensive   cultivation.     In   the   rear  /^ 
world  where  labor  is  always  more  or  less  expensive, 
land   is  never  profitably  cultivated  up  to  that  poini 
which  will  force  it  to  yield  its  maximum  product  per 
acre,  and  only  in  extremely  new  countries  where  land 
is  free  is  it  ever  profitable  to  cultivate  it  so  extensively 
as  to  yield  the  maximum  per  unit  of  labor. 

Since  so  much  labor  is  never  profitably  used  in 
connection  with  a  given  amount  of  land  as  to  produce 
the  maximum /^r  acrcy  it  follows  that,  in  any  normal 
case,  an  increase  in  the  amount  of  labor  on  such 
given  amount  of  land  will  always  increase  the  gross 
product.  But  since  so  little  labor  is  never  profitably 
used  in  connection  with  a  given  amount  of  land  as  to 
produce  the  maximum  per  unit  of  labor^  it  follows  that 
an  increase  in  the  amount  of  labor  on  a  given  amount 
of  land  will  never,  in  any  normal  case,  increase  the 
product  as  much  as  the  labor  is  increased.  That  is 
to  say,  except  on  the  frontier  it  always  pays  to  culti- 
vate land  beyond  the  point  where  diminishing  returns 
begin,  if  it  pays  to  cultivate  it  at  all,  but  it  never  pays 
to  cultivate  it  up  to  the  point  where  an  increase  in 
the  labor  would  yield  no  increase  in  the  gross  product. 


74  The  Distribution  of  Wealth 

Similarly,  since  so  much  land  is  never  profitably  used 
in  connection  with  a  given  amount  of  labor  as  to  pro- 
duce the  maximum  per  unit  of  labor,  it  follows  that, 
in  any  normal  case,  an  increase  in  the  amount  of 
land  with  such  given  amount  of  labor  will  always 
increase  the  gross  product.  But  since  so  little  land 
is  never  profitably  used  in  connection  with  a  given 
amount  of  labor  as  to  produce  the  maximum /^^  unit 
of  land,  it  follows  that,  in  any  normal  case,  an  in- 
crease in  the  land  with  such  given  amount  of  labor 
will  not  increase  the  product  as  much  as  the  land  is 
increased.  This  is  merely  a  reversed  application  of 
the  law  of  diminishing  returns  as  originally  ex- 
pounded, and  it  is  a  necessary  corollary  of  that  law. 
It  is,  moreover,  the  condition  expressed  by  formula 
IV. 

All  this  is  as  true  of  a  factory  as  of  a  farm,  and, 
by  a  change  of  terms,  all  that  has  been  said  of  the 
ratio  between  farm  land  and  the  labor  which  culti- 
vates it  could  be  repeated  of  the  ratio  between  a 
manufacturing  plant  and  the  labor  which  operates  it. 
So  much  labor  is  never  profitably  used  in  connection 
with  such  a  plant  as  to  turn  out  the  maximum 
product,  nor  is  so  much  land  and  capital  ever  profit- 
ably used  in  connection  with  a  given  amount  of  labor 
as  to  turn  out  its  maximum  product  per  unit  of 
labor.     That  is,  it  is  always  possible,  in  any  normal 


Diminishing  Returns  75 

case,  to  force  a  somewhat  larger  product  by  using 
more  labor  in  connection  with  a  given  amount  of 
land  and  capital,  or  more  land  and  capital  with  a 
given  amount  of  labor.  But,  on  the  other  hand,  so 
little  labor  is  never  profitably  used  in  connection  with 
such  a  plant  as  to  yield  the  largest  product  per  unit 
of  labor,  nor  is  so  little  land  and  capital  used  as  to 
yield  the  maximum  per  unit  of  land  and  capital. 
That  is,  though  an  increase  in  the  amount  either  of 
labor  or  of  land  and  capital  would  increase  the  gross 
product,  it  would  never,  in  any  normal  case,  increase 
the  product  as  much  as  the  labor  or  the  land  and 
capital  are  increased.  Therefore,  we  have  here  also 
all  the  essential  features  of  the  law  of  diminishing 
returns  as  it  was  originally  expounded,  the  only 
difference  being  that  we  are  here  considering  the 
productivity  of  a  fixed  amount  of  land  and  capital 
when  combined  with  varying  amounts  of  labor,  in- 
stead of  the  productivity  of  a  fixed  amount  of  land 
when  combined  with  varying  amounts  of  labor  and 
capital.  This  is  (to  repeat)  the  condition  expressed 
in  formula  VI. 

Formula  VII  is  an  expression  of  the  law  which 
governs  any  estabUshment  or  business  unit  which 
combines  a  fixed  amount  of  land  and  labor  with 
varying  amounts  of  capital.  By  a  change  of  terms, 
the  explanation   which   was   given    of    formula  VI 


yS  The  Distribution  of  Wealth 

can  be  adapted  to  this  one,  since  the  same  law 
applies  to  this  as  to  other  variations  in  the  propor- 
tion in  which  the  factors  are  combined.  That  is 
to  say,  an  increase  in  the  amount  of  capital  used 
in  any  typical  estabHshment  (land  and  labor  re- 
maining the  same)  will  increase  the  total  product, 
but  not  as  much  as  the  capital  is  increased.  On 
the  other  hand,  allowing  the  capital  to  remain  the 
same,  an  increase  in  the  labor  and  the  land  will 
also  increase  the  total  product,  but  not  as  much  as 
the  labor  and  land  are  increased. 

We  are  therefore  driven  to  the  conclusion  that 
there  is  one  law  which  governs  the  results  of  every 
variation  of  the  proportion  in  which  the  productive 
factors  are  combined,  no  matter  which  factor  is 
varied.  It  never  pays  to  combine  so  little  of  any 
one  factor  with  so  much  of  the  others  as  to  get  the 
largest  possible  product  in  proportion  to  the  one, 
unless  the  others  are  absolutely  free  and  do  not 
need  to  be  economized,  in  which  case  they  pass 
over  into  the  class  of  non-economic  factors  like  air 
and  sunlight.  This  is  equivalent  to  saying  that, 
where  each  factor  costs  something,  it  always  pays 
to  combine  them  in  such  proportions  that  if  any 
one  or  two  of  them  were  increased  it  would  increase 
the  product,  but  not  so  much  as  the  variable  factor, 
or  factors,  were  increased.     In  every  normal  case, 


Diminishing  Returns  77 

therefore,  where  the  factors  are  wisely  combined,  a^ 
law  of  diminishing  returns  operates  with  respect  toj 
each   of  the   factors,  and   not  with   respect  to  on^' 
alone. 

^i  But  what  is  the  most  profitable  proportion  in 
which  to  combine  the  various  factors  of  production? 
^As  already  suggested,  this  depends  upon  their  rela- 
tive cost.  The  more  expensive  one  factor  is  in  com- 
parison with  the  others  the  more  necessary  it  is  to 
economize  in  the  use  of  that  one.  There  are,  for 
example,  several  ways  to  grow  a  hundred  bushels  of 
corn.  One  is,  to  use  much  labor  with  little  land, 
makmg  the  land  produce  a  heavy  crop,  but  getting 
a  small  product  per  unit  of  labor.  Another  is  to  use 
little  labor  with  much  land,  getting  a  comparatively 
light  crop  from  the  land,  but  enabling  the  labor  to 
produce  a  larger  amount  per  unit.  Which  is  the 
more  economical  of  these  two  ways  will  depend  upon 
the  relative  cost  of  land  and  labor.  Where  land  is 
dear  and  labor  cheap,  the  former  is  the  better 
method;  but  where  land  is  cheap  and  labor  dear, 
the  latter  method  is  better.  There  are  also  several 
ways  of  producing  a  hundred  yards  of  cloth.  One 
is  to  use  much  labor  with  little  machinery,  driving  the 
machinery  at  a  high  rate  of  speed  and  making  it  turn 
out  a  large  product,  but  getting  a  comparatively  small 
product  per  unit  of  labor.     Another  is  to  use  little 


I 


78  The  Distribution  of  Wealth 

labor  with  much  machinery,  enabling  the  labor  to 
work  efficiently  and  turn  out  a  large  product  per 
unit,  but  getting  a  comparatively  small  product  per 
machine.  Here  again,  the  question  as  to  the  more 
economical  method  depends  upon  the  relative  cost 
of  the  two  factors. 

The  general  rule  may  be  laid  down  that,  with  a 
given  amount  of  land  or  capital,  it  pays  best  to  com- 
bine that  amount  of  labor  which  will  just  enable  any 
unit  to  add  as  much  to  the  total  product  as  that  unit 
costs.  For  a  fuller  explanation  it  is  necessary  to 
refer  again  to  the  table  on  p.  58.  As  the  amount  of 
labor  used  on  this  field  increases  beyond  20  days, 
there  is  a  smaller  product  per  day,  but  more  than 
that,  there  is  a  still  smaller  additional  product  created 
by  each  additional  increment  of  labor.  When  the 
labor  increases  from  20  to  25  days,  the  product 
increases  from  380  to  450  bushels,  making  an  ad- 
ditional product  of  70  bushels  resulting  from  the 
addition  of  5  days'  labor  to  the  existing  force.  Each 
of  the  additional  5  days,  therefore,  added  14  bushels 
to  the  product,  though  the  average  product  per  day 
for  the  whole  25  days  was  18  bushels.  This  addi- 
tional product  of  14  bushels  is  sometimes  technically 
called  the  mar^nal  product,  or  the  product  of  the 
marginal  labor,  to  distinguish  it  from  the  average 
product  or  the  product  of  the  average  labor.     Again, 


Diminishing  Returns  79 

when  the  labor  is  increased  to  30  days,  the  total 
product  is  increased  from  450  to  510  bushels.  This 
increase  of  5  days  brought  an  increase  of  60  bushels 
in  the  crop,  making  an  additional,  or  marginal,  prod- 
uct of  12  bushels  per  day,  though  the  average  prod- 
uct for  the  whole  30  days  is  17  bushels.  When  the 
labor  is  again  increased  from  30  to  35  days,  the  crop 
is  increased  by  50  bushels,  making  a  marginal  product 
of  10  bushels.  The  marginal  product  continues  fall- 
ing with  each  increase  in  the  amount  of  labor,  until 
finally,  when  the  labor  is  increased  from  45  to  50  days, 
the  total  product  is  increased  by  only  20  bushels,  mak- 
ing a  marginal  product  of  only  4  bushels. 

Now  if  the  price  of  a  day's  labor,  such  as  is  here 
contemplated,  were  equal  to  the  price  of  1 1  bushels 
of  corn,  it  would  not  pay  the  farmer  of  this  land 
so  well  to  hire  50  days'  labor  as  it  would  to  hire  45. 
Fifty  days  would  cost  him  55  bushels  more  than  45 
days  would  cost,  and  would  produce  only  20  bushels 
more.  The  extra  5  days  would  net  him  a  loss  of  35 
bushels.  On  the  other  hand,  it  would  not  pay  him 
to  stop  with  only  25  days.  Thirty  days  would  cost 
him  only  55  bushels  more,  but  they  would  produce 
60  bushels  more.  He  would  therefore  make  a  net 
gain  of  5  bushels  by  hiring  the  extra  5  days.  But 
it  would  not  pay  him  to  hire  35  days'  labor,  because 
they  would   only  produce  50  bushels  more  than  30 


8o  The  Distribution  of  Wealth 

days  would  produce,  and  he  would  therefore  lose  5 
bushels  on  the  extra  5  days.  At  the  assumed  price 
of  labor,  30  days  would  be  the  most  profitable  appli- 
cation of  labor  to  this  land.  But  if  a  day's  labor  cost 
only  the  price  of  9  bushels,  35  days  would  pay  better 
than  30,  because  they  would  cost  only  45  bushels 
more,  and  would  produce  50  bushels  more.  In  short, 
it  always  pays  best  to  apply  to  this  or  any  other 
piece  of  land  as  much  labor  as  will  yield  a  marginal 
product  approximately  equal  to  its  cost  per  unit, 
whatever  that  cost  may  be. 

The  same  principle  will  determine  the  amount  of 
land  which  ought  to  be  used  with  a  fixed  amount  of 
labor  (and  capital).  If  a  farmer  has  a  certain 
amount  of  labor  at  his  disposal  which  he  must  use 
or  allow  to  go  to  waste,  he  will  find  it  to  his  advan- 
tage to  use  as  much  land  as  will  enable  each  acre 
to  add  as  much  to  the  total  crop  as  it  costs  per  year. 
That  is  to  say,  the  marginal  product  of  the  land 
should  just  equal  its  rent.  Let  us  assume  that  he 
has  50  days'  labor,  such  as  is  assumed  in  Table  A,  and 
that  he  is  in  doubt  as  to  how  much  land,  of  the 
grade  described  in  the  san\e  table,  he  ought  to  culti- 
vate with  that  labor.  If  he  should  use  it  all  in  the 
cultivation  of  10  acres  of  corn,  he  would  get,  accord- 
ing to  the  table,  a  total  crop  of  650  bushels.  But  if 
he  should  cultivate  11^  acres,  he  ought,  according  to 


Diminishing  Returns  8i 

the  same  table,  to  get  a  total  crop  of  700  bushels. 
Fifty  days'  labor  would  cultivate  1 1^  acres  with  the 
same  degree  of  intensity  as  45  days  would  cultivate 
10  acres,  since  the  ratio  of  labor  to  land  would  be 
the  same  in  both  cases.^  45  :  10: :  50:  iij.  Ten 
acres  cultivated  at  that  degree  of  intensity  produced 
a  crop  of  630  bushels,  and  11^  acres  cultivated  at 
the  same  degree  of  intensity  ought  to  produce  a  crop 
of  700  bushels.  10:630:;  11^  :  700.  The  addition 
of  I J  acres,  therefore,  would  produce  an  additional 
crop  of  50  bushels,  which  makes  a  marginal  product 
of  45  bushels  per  acre. 

Now,  if  the  farmer  could  get  his  land  at  a 
lower  rental  than  45  bushels  per  acre,  it  would 
pay  him  better  to  rent  iij  acres  than  10.  But  if 
the  rent  per  acre  just  equalled  the  price  of  45  bush- 
els, it  would  be  a  matter  of  indifference  to  him, 
since  in  either  case  he  would  have  the  same 
amount  left,  viz.,  200  bushels,  or  4  bushels  per  day, 
to  pay  him  for  his  labor.  But  if  he  had  to  pay 
only  36  bushels  per  acre  as  rent,  it  would  be  a 
matter  of  indifference  to  him  whether  he  cultivated 
11-^  or  12 J  acres  with  his  50  days'  labor.  If  he 
should  cultivate  12J  acres,  he  ought  to  produce  as 
much,  per  acre   as  40   days   could   produce   on    10 

1  This,  of  course,  leaves  out  of  account  a  possible  increase  or  de- 
crease in  the  economy  of  large-scale  production. 
G 


82 


The  Distribution  of  Wealth 


acres.  40:  lo: :  50: 12J.  Since,  according  to  the 
table,  40  days  on  10  acres  produced  600  bushels, 
50  days  on  I2|-  acres  ought  to  produce  750 
bushels.     10:600;:  12^:750. 

As  we  saw  in  the  preceding  paragraph  that  50 
days  on  1 1^  acres  produced  700  bushels,  and  as  we 
have  now  found  that  the  same  amount  of  labor  on 
12 J  acres  would  produce  750  bushels,  it  appears  that 
the  addition  of  i^^^  acres  to  the  combination  added 
50  bushels  to  the  product.  This  makes  a  marginal 
product  of  36  bushels  per  acre. 

By  a  study  of  the  following  table,  which  is  de- 
rived from  Table  A,  it  can  easily  be  determined, 
approximately,  how  many  acres  of  this  kind  of 
land  the  farmer  in  question  could  afford  to  culti- 
vate at  any  given  rental  between  10  and  45  bushels 
per  acre. 

TABLE   D 


Number  of  acres 

cultivated  by  50 

days'  labor 

ToUl  product 

Number  of  acres 
added  each  time 

Marginal  product 
per  acre 

10 

650 

Hi 

700 

li 

45 

I2i 

750 

II^ 

36 

14* 

800 

iH 

28 

i6| 

850 

2h 

21 

20 

900 

3i 

15 

25 

950 

5 

10 

Diminishing  Returns  S^ 

This  table  has  been  partly  explained  already. 
The  product  of  50  days  on  10  acres  was  taken 
bodily  from  Table  A.  The  product  of  the  same 
number  of  days  on  the  various  quantities  of  land 
named  in  the  first  column  is  found  by  the 
process  of  simple  proportion.  In  Table  A  was 
given  the  product  of  10  acres  when  cultivated  by 
varying  amounts  of  labor.  By  increasing  the  num- 
ber of  acres  to  be  cultivated  by  50  days'  labor, 
so  as  to  reproduce  the  proportions  between  labor 
and  land  which  were  given  in  Table  A,  it  is  easy  to 
calculate  the  total  product  in  each  case.  The  mar- 
ginal product  is  found  by  dividing  the  additional 
product  in  each  case  by  the  additional  acres  which 
it  took  to  produce  it. 

In  the  foregoing  illustration,  labor  and  capital 
have  been  treated  as  one  factor,  or  rather,  capital 
has  been  merged  with  labor  —  this  for  the  purpose 
of  reducing  the  number  of  factors  and  simplifying 
the  illustration.  But  the  same  reasoning  would 
apply  to  an  illustration  where  land  and  capital  were 
treated  as  a  single  factor  in  the  form  of  an  indus- 
trial plant,  —  whether  a  farm  or  a  factory  would 
make  no  difference.  With  a  given  industrial  plant, 
consisting  of  a  fixed  amount  of  land,  buildings,  and 
machinery,  the  most  profitable  application  of  labor 
would    be   that   which   would    make    the    marginal 


\ 


84  The  Distribution  of  Wealth  ^ 

product  of  labor  just  equal  to  its  cost  per  unit.  /  j 
This  is  what  is  meant  by  running  such  a  plant  at 
its  true  capacity.^  This  could  be  shown  by  con- 
structing another  table  on  the  plan  of  Table  A,  or 
even  by  changing  the  headings  of  the  columns  of 
that  table.  We  might,  for  example,  let  the  first 
column  represent  the  varying  numbers  (in  hun- 
dreds) of  laborers  who  might  be  employed  in  a 
shoe  factory,  and  let  the  second  column  represent 
the  numbers  of  shoes  produced  in  a  given  time. 
The  third  column  would  then  represent  the  num- 
ber produced  per  laborer  in  that  time.  The  reader 
can  determine  for  himself,  by  the  method  out- 
lined above,  what  would  be,  in  this  assumed  case, 
the  most  profitable  number  of  laborers  to  employ 
at  any  given  rate  of  wages.  The  chief  difficulty 
with  this  illustration  is  that  it  assumes  a  uniform 
rate  of  wages  for  the  various  laborers  employed 
in  such  an  establishment;  but  this  will  be  con- 
sidered later.  Then  by  changing  the  headings  of 
the  columns  in  Table  D,  it  could  be  detertnined, 
theoretically,  how  much  land  and  capital  to  use 
with  a  given  amount  of  labor  in  the  manufacture 
of  shoes. 

We  have  not  yet  reached  a  good  stopping-place  in 
our  extension  of  the  principle  of  diminishing  returns. 

1  See  Chapter  I,  p.  39. 


Diminishing  Returns  85 

The  grouping  of  the  factors  of  production  into  the  three 
classes,  labor,  land,  and  capital,  is  by  no  means  final. 
There  are  various  kinds  of  labor,  of  land,  and  of  capi- 
tal. Two  different  kinds  of  labor  may  be  performing 
functions  which  differ  almost  as  widely  as  those  per- 
formed by  labor  and  capital,  or  by  labor  and  land. 
The  work  of  a  bookkeeper  differs  as  widely  from 
that  of  a  ditch  digger,  as  that  of  a  ditch  digger  does 
from  that  of  a  steam  shovel.  Therefore,  the  same 
reasons  which  favor  the  separation  of  labor  and  capi- 
tal, in  order  that  they  may  be  treated  as  distinct 
factors,  will  also  favor  the  separation  of  one  kind  of 
labor  from  another,  of  one  kind  of  capital  from 
another,  and  of  one  kind  of  land  from  another. 
Let  us  assume  that  in  a  given  industrial  unit,  say  a 
factory,  one  kind  of  labor  is  varied  in  amount,  while 
the  land,  capital,  and  other  kinds  of  labor  remain 
the  same.  The  product  of  the  factory  will  not  vary 
in  exact  proportion  to  the  variation  in  the  amount  of 
the  one  kind  of  labor,  nor  will  it  remain  unchanged 
as  though  entirely  unaffected  by  variations  in  this 
kind  of  labor.  Here  we  have  every  essential  feature 
of  the  law  of  diminishing  returns  as  it  was  originally 
developed.  This  extension  of  the  law  is  capable  of 
an  indefinite  number  of  applications.  Instead  of 
assuming  a  variation  in  one  kind  of  labor,  as  in  the  §/ 
above  illustration,  we  may  assume  a  variation  in  the  v. 


86  The  Distribution  of  Wealth 

amount  of  any  other  kind  of  labor,  of  any  kind  of 
capital,  or  of  any  kind  of  land. 

A  complete  formula  which  should  show  every 
possible  application  of  this  extension  of  the  law  of 
diminishing  returns  would  require  a  separate  term 
for  each  and  every  kind  of  labor,  capital,  and  land. 
But  such  a  formula  would  be  long  and  unwieldy. 
The  following  simple  formula,  though  incomplete, 
will  have  to  suffice. 

II 


A 

""s-g. 

g» 

|| 

III.  If 

X     with 

Y 

IX.  then 

aX     with 

Y 

X.  and 

X     with 

aY 

will  produce  ..../*, 

will  produce  more  than  P,  but  less  than  aP, 

will  produce  more  than  P,  but  less  than  aP. 

Formula  IX  is  an  expression  of  the  conditions 
which  exist  in  any  large  and  complex  establishment 
which  combines  many  kinds  of  labor  and  capital  — 
possibly  of  land  also.  Let  us  take  a  railroad  as  an 
example.  With  a  given  road-bed,  and  with  a  given 
equipment  in  the  way  of  depots,  offices,  machine 
shops,  etc.,  and  with  a  given  labor  force,  an  increase 
in  the  rolling  stock  will,  between  rather  wide  limits, 
enable  the  road  to  carry  more  freight  and  passengers, 
but  this  increase  in  its  capacity  will  not  be  propor- 
tional to  the  increase  in  the  rolling  stock.     That  is  to 


Diminishing  Returns  87 

say,  unless  the  road  were  so  abundantly  equipped 
with  engines  and  cars  that  absolutely  no  more  could 
be  conveniently  handled  by  the  existing  force  on  the 
existing  tracks,  such  an  increase  would  enlarge  its 
carrying  capacity.  But  such  an  over-equipment  of 
rolling  stock  would  be  similar  to  the  case  of  a  farm 
which  combined  so  much  labor  and  capital  on  a 
given  piece  of  land  as  to  get  the  maximum  product 
per  acre,  which,  as  we  have  already  seen,  would  not 
be  the  most  profitable  proportion  unless  labor  and 
capital  could  be  had  entirely  free  of  cost.  And  un- 
less the  road  were  so  poorly  equipped  with  rolling 
stock  that  each  engine  and  car  could  be  worked  up 
to  the  absolute  limit  of  its  capacity,  an  increase  in 
the  rolling  stock  would  not  proportionally  increase 
the  carrying  capacity  of  the  road.  But  such  an 
under-equipment  of  rolling  stock  would  be  similar  to 
a  farm  which  employed  so  little  labor  and  capital  in 
proportion  to  the  land  as  to  get  the  maximum  prod- 
uct per  unit  of  labor  and  capital,  which  would  not 
be  the  most  economical  proportion  unless  the  land 
could  be  had  absolutely  free  of  cost.  Unless,  there- 
fore, the  road  were  equipped  as  though  rolling  stock 
formed  no  part  of  the  expense,  and  the  problem  of 
the  management  was  to  do  the  largest  possible 
amount  of  carrying  in  proportion  to  the  cost  of  the 
rest  of  the  equipment,  or  unless  it  were  equipped  as 


88  The  Distribution  of  Wealth 

though  the  rest  of  the  equipment  formed  no  part  of 
the  expense  and  the  problem  was  to  do  the  largest 
possible  amount  of  carrying  in  proportion  to  the 
cost  of  the  rolling  stock,  the  proposition  would  hold 
good  that  an  increase  in  the  rolling  stock  would 
increase,  but  not  proportionally,  the  carrying  capacity 
of  the  road.  The  same  may  be  said,  under  normal 
conditions,  of  an  increase  in  any  other  kind  of  capi- 
tal, or  in  any  kind  of  labor,  though,  of  course,  it 
would  be  possible  to  name  some  kinds  which  would 
be  of  so  little  importance  to  the  running  of  the  road 
as  to  make  the  effect  of  an  increase  almost  imper- 
ceptible. 

This  is  sometimes  called  a  case  of  increasing  re- 
turns, but  that  is  a  mistake,  and  is  based  upon  defec- 
tive analysis.  Increasing  returns  would  exist  only 
when  an  increase  in  the  rolling  stock  would  more 
than  proportionally  increase  the  carrying  capacity 
of  the  road,  and  not  when  it  simply  increased  the 
carrying  capacity  more  than  it  increased  the  total 
cost  of  operation.  Doubling  the  rolling  stock  would 
not,  in  any  normal  case,  more  than  double  the  carry- 
ing capacity,  though  it  might  increase  the  profits  by 
increasing  the  carrying  capacity  more  than  it  in- 
creased the  total  cost,  the  reason  being  that  a  large 
part  of  the  cost  of  operation  would  not  be  increased 
at  all.     It  will  be  remembered  that  we  found  that  it 


Diminishing  Returns  89 

always  pays  to  cultivate  a  farm  beyond  the  point 
where  diminishing  returns  begin,  —  that  is,  if  the 
land  costs  anything.  If  any  expensive  piece  of  land 
were  being  cultivated  only  up  to  the  point  where 
diminishing  returns  begin,  an  increase  in  the  labor 
and  capital  would  not  proportionally  increase  the 
product,  though  it  would  increase  the  product  more 
than  it  would  increase  the  total  cost,  thereby  increas- 
ing the  profits  of  the  farm.  The  reason  is,  in  this 
as  in  the  other  case,  that  one  element  in  the  cost, 
viz.,  rent,  would  not  be  increased  at  all.  What  is 
really  meant  by  calling  this  a  case  of  increasing 
returns  is  that  the  road  is  not  securing  the  maximum 
economy  until  it  is  able  to  combine  the  various 
factors  in  such  proportions  as  will  make  the  marginal  ^ 
productivity  ^l  each  factor  equal  to  its  cost.  This 
is  impossible  for  some  railroads,  owing  to  lack  of 
available  traffic,  and  it  is  also  impossible  for  many 
other  industrial  establishments  for  similar  reasons. 
\  The  conclusion  is,  therefore,  that  in  any  industrial 
establishment,  it  is  most  profitable  to  use  that  amount 
of  each  factor  which  will  make  its  marginal  product 
just  equal  to  its  cost.  /  If,  by  increasing  any  factor, 
there  would  be  added  to  the  total  product  of  the 
establishment  more  than  enough  to  pay  the  cost  of 
increasing  that  factor,  obviously  it  would  pay  to 
increase  it.     Or  if,  by  decreasing  such  a  factor,  more 


go  The  Distribution  of  Wealth 

would  be  saved  in  its  cost  than  would  be  lost  in 
the  diminution  of  the  total  product,  it  would  pay  to 
decrease  it.  The  same  principle  helps  to  determine 
the  most  profitable  size  for  the  whole  estabhshment. 
Even  when  the  various  factors  are  combined  in  the 
right  proportions,  it  may  pay  the  owner  to  enlarge 
or  contract  the  whole  establishment  by  increasing 
or  decreasing  all  the  factors.  If,  by  thus  enlarging 
the  estabhshment,  the  total  product  can  be  increased 
more  than  the  cost,  obviously  it  will  pay  to  enlarge. 
It  is  equally  obvious  that  it  will  pay  to  contract  if  by 
so  doing  the  product  will  be  decreased  less  than  the 
cost.  Either  method  would  increase  the  surplus 
remaining  after  paying  the  cost  of  the  three  factors 
named.  This  means  that  the  most  profitable  size 
for  the  establishment  is  that  under  which  the  margi- 
nal product  of  all  the  factors  combined  will  just 
equal  their  cost. 
/^  But  this,  it  must  be  observed,  does  not  necessarily 
give  the  size  which  will  give  the  largest  total  product 
in  proportion  to  the  land,  labor,  and  capital  employed. 
The  reason  is  that  there  is  another  factor,  not  usually 
classified  under  any  of  these  heads,  with  which  we 
must  reckon,  and  to  which  we  may  give  the  name 
mattagement.  An  industrial  establishment  is  a  com- 
bination of  various  factors  under  one  management, 
and  the  question  of  large  or  small  scale  production 


Diminishing  Returns  91 

becomes,  therefore,  a  question  of  the  proportion 
between  the  factor  called  management,  on  the  one 
hand,  and  all  the  other  factors,  on  the  other.  For- 
mula III,  which  was  given  as  an  expression  for  the 
law  of  increasing  or  decreasing  economy  of  large- 
scale  production,  may  be  modified  as  follows,  to  take 
account  of  this  new  factor :  — 


3 

sa       »-)         h3        u 


^  o 


If       Afwith  JC  with  Y  with  Z  will  produce     .    .    P, 
then  HI  with  a  Jf  with  a  Y  with  aZ  will  produce 


((Increasing  econ- 
omy  of  large-scale 
production.) 
f  (Decreasing  econ- 

,  -,  J  omy  of  large-scale 

than  a/*  I        ^,      .    % 
[  production.) 

From  this  it  will  appear  that  the  law  of  the  in- 
creasing or  decreasing  economy  of  large-scale  pro- 
duction, while  sufficiently  distinct  from  that  of 
increasing  or  diminishing  returns  to  warrant  a  dif- 
ference of  name,  is  yet  fundamentally  very  much 
like  it. 

The  similarity  is  most  important  when  we  consider 
the  difference  between  that  size  which  will  enable 
an  establishment  to  turn  out  the  largest  product  in 
proportion  to  the  land,  labor,  and  capital  employed, 
and  that  which  will  enable  it  to  turn  out  the  largest 
surplus  over  and  above  the  cost  of  these  three  fac- 
tors.    A  small  establishment,  being  more  easily  man- 


92  The  Distribution  of  Wealth 

aged,  might  be  able  to  turn  out  a  larger  product  in 
proportion  to  these  elements  in  the  cost  of  operation 
than  a  large  one  could,  and  yet,  owing  to  the  small- 
ness  of  the  total  product,  the  surplus  might  not  be 
enough  to  enable  the  manager  to  live.  He  might, 
for  example,  be  able  to  manage  a  ten-acre  wheat 
farm  so  well  that  it  would  produce  ^200  worth 
of  wheat  at  a  cost,  in  the  way  of  rent,  wages, 
and  interest,  of  only  ;?ioo,  whereas  if  he  ran  a 
hundred-and-sixty-acre  farm  he  might  be  able  to 
make  it  produce  only  $3000  worth  of  wheat  at 
a  cost  of  $2000.  In  the  former  case  the  prod- 
uct would  be  twice  the  cost,  and  in  the  latter 
case  only  one-half  greater;  yet  the  latter  would 
leave  the  manager  ;^iooo,  while  the  former  would 
leave  him  only  $100.  The  latter  would  be,  from 
the  standpoint  of  the  owner  of  the  farm,  a  better 
proportion  than  the  former  between  management 
and  the  other  factors. 

But  if  we  could  imagine  managing  ability  being 
so  abundant  and  so  cheap  that  its  cost  could  be 
eliminated,  and  that  rent,  wages,  and  interest  consti- 
tuted the  whole  cost,  a  series  of  ten-acre  farms,  six- 
teen in  number,  under  separate  managers,  would  be 
a  better  proportion  than  one  farm  of  a  hundred  and 
sixty  acres.  Under  these  assumed  conditions,  the 
best  proportion  between  the  factor  called   manage- 


Diminishing  Returns  93 

ment  and  the  others  would  be  that  which  would  yield 
the  largest  product  in  proportion  to  the  others,  just 
as  we  found,  when  we  assumed  that  an  indefinite 
amount  of  land  of  the  same  grade  could  be  had  free 
of  cost,  that  it  would  pay  to  use  as  much  land  with 
a  given  amount  of  labor  and  capital  as  would  yield 
the  largest  product  in  proportion  to  these  factors. 
In  other  words,  it  would  pay  to  stop  cultivating  the 
land  at  that  point  where  increasing  returns  leave  off 
and  diminishing  returns  begin.  But  seeing  that  the 
factor  called  management  is  both  scarce  and  expen- 
sive, it  can  not  be  eliminated  from  the  cost,  and  it 
must  therefore  be  economized  just  as  land  or  any 
other  expensive  factor  has  to  be  economized.  The 
way  to  economize  it  is  to  use  less  of  it  in  proportion 
to  the  other  factors,  which  means  that  they  would 
not  be  so  managed  as  to  yield  their  maximum.  The 
same  rule  applies  here  as  to  the  other  problems 
relating  to  the  proportions  in  which  to  combine  the 
various  factors,  viz.,  as  many  other  factors  should  be 
combined  with  a  given  amount  of  management  — 
such  an  amount,  for  example,  as  can  be  furnished  by 
a  given  manager — ^as  will  make  their  marginal 
product  equal  to  their  cost.  )  This  means  that 
they  should  be  employed  in  larger  amounts  than 
would  give  them  the  largest  productivity  per  unit, 
beyond  the  point,  in  other  words,  where  diminishing 


94  The  Distribution  of  Wealth 

returns  (or  decreasing  economy  of  large-scale  pro- 
duction) begin.  In  this  particular  also,  the  factor 
called  management  comes  under  the  same  general 
law  as  the  other  factors. 

The  conclusions  thus  far  reached  in  this  chapter 
may  be  summarized  as  follows  :  in  the  creation  of 
any  product  where  there  are  various  factors  em- 
ployed, usually  classified  as  labor,  land,  and  capital, 
the  amount  of  the  product  does  not  depend  wholly^ 
upon  any  one  or  any  two  of  these  groups  of  'fac- 
tors, but  upon  all  three.  Consequently,  if  anyone 
or  any  two  groups  are  varied  in  amount,  the  rest 
remaining  the  same,  the  product  will  vary,  but  not 
in  exact  proportion  to  the  variable  factors. '  In  all 
normal  cases,  —  that  is,  where  the  various  factors  have 
been  combined  in  profitable  proportions,  —  if  some  of 
the  factors  are  increased,  the  increase  in  the  product 
will  not  be  so  great  as  the  increase  in  these  factors. 
Thus,  if  the  land  remains  the  same  while  the  lator 
and  capital  are  increased,  the  product  will  increase, 
but  not  in  proportion  to  the  labor  and  capital.  Or 
if  the  labor  and  capital  remain  the  same  while  the 
land  is  increased,  the  increase  in  the  product  will  not 
be  so  great  as  the  increase  in  the  land.  But  the 
factors  of  production  can  be  classified  into  a  great 
many  smaller  groups  than  these.  There  are  a  great 
many   kinds   of  labor,  of  land,  and  of  capital,  each 


Diminishing  Returns  95 

one  of  which  may  be  regarded  as  a  separate  group, 
and  all  that  was  said  of  the  larger  groups  can  also 
be  said  of  these  smaller  ones.  Though  after  the 
law  of  diminishing  returns  has  begun  to  operate  with 
respect  to  any  factor  an  increase  of  that  factor  will 
not  correspondingly  increase  the  total  product  of 
the  establishment,  it  will,  however,  increase  the 
product  more  than  it  will  increase  the  total  cost  — 
up  to  the  point  where  the  marginal  product  of  that  ^ 

fagj^r  is  just  equal  to  its  cost.  *  [y^' 

y^  From  the  standpoint  of  the  distribution  of  wealth,  A/^ 
each  and  every  phase  of  this  universal  law  of 
diminishing  returns  is  important,  for  each  and  every 
one  has  an  important  part  in  determining  some  share 
in  distributioh.  But  no  other  phase  of  the  law  is  of 
such  far-reaching  importance  as  that  which  was 
originally  developed,  and  to  which  the  term  was 
originally  applied.  Though  it  is  the  same  law  which 
determines  the  productivity  of  varying  amounts  of 
land  when  combined  with  a  fixed  amount  of  labor 
and  capital,  as  that  which  determines  the  productivity 
of  varying  amounts  of  labor  and  capital  with  a  fixed 
amount  of  land,  or  of  varying  amounts  of  labor  with 
fixed  amounts  of  land  and  capital,  yet,  as  a  matter  of 
fact,  the  available  amount  of  land  in  the  world  at 
large  varies  less  than  the  other  factors.  In  any 
civilized   country    the    available    land    supply   is    a 


g6  The  Distribution  of  Wealth 

relatively  fixed  quantity,  while  the  labor  and  capital 
are  continually  varying.  Moreover,  these  variations 
are  the  products  of  the  human  will,  while  the  supply 
of  land  is  practically  beyond  control. 

This  difference,  however,  is  of  more  importance  in 
the  study  of  the  problem  of  the  production  of  wealth, 
in  any  geographical  area  such  as  any  of  the  countries 
of  Europe  or  America,  or  of  the  maintenance  of  the 
population  of  such  countries,  than  in  the  study  of 
distribution.  From  the  law  of  diminishing  returns 
in  its  original  form  is  derived  the  conclusion  that  if, 
in  any  given  state  of  civilization  and  the  industrial 
arts,  the  supply  of  labor  should  increase  through  the 
growth  of  population,  while  land  and  capital  remain 
the  same,  or  if  the  labor  supply  should  increase  faster 
than  that  of  land  and  capital,  the  average  production 
of  wealth  per  head  would  diminish.  This  is  to  say, 
the  increase  in  the  total  production  of  wealth  would 
not  be  so  great  as  the  increase  in  the  supply  of 
labor,  though  there  would  be  a  larger  production  in 
proportion  to  the  land  and  capital.  But  if,  with  the 
increase  in  the  supply  of  labor,  there  sl\ould  take 
place  an  improvement  in  the  arts  of  production,  or 
an  increase  in  the  supply  of  capital,  or  the  available 
supply  of  land  (through  improvements  in  transpor- 
tation), a  larger  production  of  wealth  per  laborer 
would  be  quite  possible  and  fully  in  harmony  with 


Diminishing  Returns  97 

the  law  of  diminishing  returns.  And  if  the  supply 
of  labor  should  remain  the  same  while  the  land  and 
capital  increased,  or  if  these  should  increase  faster 
than  labor,  a  larger  total,  and  consequently  a  larger 
per  capita,  production  would  result. 
VThat  a  stationary  state  of  civilization  and  the  in- 
dustrial arts  may  exist  along  with  a  growing  density 
of  population  is  a  somewhat  violent  assumption,  since 
density  of  population  is  often,  especially  in  western 
countries,  an  important  factor  in  stimulating  progress. 
In  the  first  place,  greater  density,  up  to  a  certain 
point,  makes  possible  a  higher  degree  of  industrial 
organization  and  a  more  minute  division  of  labor, 
both  of  which  add  powerfully  to  the  efficiency  of  pro- 
duction. In  the  second  place,  the  mere  proximity 
of  persons  to  one  another  tends  to  stimulate  mental 
activity  and  to  increase  inventiveness  through  the 
multiplication  of  suggestions.  The  chances  are  that 
ten  men  will  think  of  more  things  than  one  man,  and 
where  they  are  in  close  touch  with  one  another  the 
thought  of  one  becomes  the  thought  of  all.  And  in 
many  other  ways,  also,  does  density  of  population 
promote  progress. 

/Nevertheless,   if  civilization    should    remain   rela- 
tively    stationary    while     population     increases 
density,  there  would  be  a  smaller  per  capita  produc 
tion  because  of  the  law  of  diminishing  returns.     The  * 


98  The  Distribution  of  Wealth 

terrible  reality  of  this  law  is  witnessed  by  the  over- 
crowding of  those  populations  where,  as  in  the  un- 
changing East,  civilization  has  become  stationary  — 
enveloped  in  a  **  crust  of  custom  "  which  counteracts 
and  destroys  the  enlivening  effects  of  density.  It  is 
also  witnessed  by  the  conditions  which  continually 
face  uncivilized  tribes  whose  means  of  livelihood  are 
precarious  and  who  must  therefore  jealously  guard 
their  hunting  grounds  against  the  incursions  of  out- 
siders. They  well  know  that  a  contraction  of  their 
hunting  area,  or  an  increase  in  the  number  of  hunters 
in  the  same  area,  means  scarcer  food.  Many  of  the 
wars  and  migrations  of  prehistoric  times  have  doubt- 
less been  forced  by  the  cruel  necessities  of  this  law. 
Even  under  the  conditions  of  modern  civilization,  the 
operation  of  this  law  can  be  clearly  observed  with 
respect  to  any  particular  industry.  Hunting  and 
fishing  still  decline  speedily  in  productivity  when 
the  number  of  hunters  or  fishers  increases  in  any 
given  area  of  land  or  water.  Pasturage  still  con- 
forms to  the  same  law,  as  it  did  in  the  days  of 
Abraham  and  Lot.  Agriculture  bectmes  less  re- 
munerative under  the  same  conditions,  which  alone 
accounts  for  the  migration  of  farmers  from  the  more 
densely,  to  the  less  densely,  settled  areas  of  the  same 
general  fertility.  Even  manufacturing  becomes  less 
productive   per  unit  of  labor  and  capital  employed. 


UNIVERSITY 

OF 

Diminishing  Returns  99 

after  the  best  situations  have  been  occupied  and  the 
existing  plants  have  reached  the  maximum  economy 
of  large-scale  production. 

But  with  respect  to  the  livelihood  of  a  complex 
population,  considering  all  its  industries  in  a  mass, 
the  operation  of  the  law  is  not  so  clearly  perceived. 
For  a  sparse  population,  hunting  and  fishing  may 
prove  the  most  remunerative  of  all  industries,  and 
yet  may  not  furnish  so  good  a  living  as  some  other 
occupation  would  furnish,  under  the  same  outward 
conditions,  to  a  larger  population.  Pasturage,  for 
example,  might  be  out  of  the  question  because  of  the 
depredations  of  wild  beasts  which  a  sparse  population 
would  be  unable  to  exterminate  or  hold  in  check. 
But  with  a  population  large  enough  to  hold  the 
noxious  beasts  in  check,  pasturage  might  prove  more 
remunerative  than  hunting  and  fishing  had  ever  been. 
Again,  agriculture  might  be  unremunerative  for  a 
sparse  population  because  of  the  unequal  contest 
with  the  forces  of  nature.  The  owner  of  a  small 
field  in  the  midst  of  a  forest  must  fight  continually 
against  the  efforts  of  the  forest  to  reestablish  itself. 
This  fight  naturally  becomes  more  strenuous  on  the 
border  between  field  and  forest.  In  the  case  of  a 
small  field,  the  ratio  of  the  border  to  the  whole  area 
is  large ;  but  in  the  case  of  a  large  number  of  adjoin- 
ing fields,  this  ratio  is  smaller.    For  this  reason  alone, 


lOO  The  Distribution  of  Wealth 

if  for  no  other,  the  owners  of  a  large  number  of 
adjoining  fields  find  it  easier  to  keep  back  the 
forest.  This,  combined  with  other  reasons,  may 
make  agriculture  more  remunerative  for  a  slightly 
more  dense  population  than  pasturage  had  been  for 
a  sparse  population.  Following  out  the  argument,  it 
would  not  be  difficult  to  think  of  reasons  why  manu- 
facturing might  become  still  more  remunerative  for  a 
still  more  dense  population,  though  less  remunera- 
tive for  a  sparse  population.  Again,  the  develop- 
ment of  one  industry  frequently  helps  the  others. 
Manufacturing,  for  example,  makes  even  hunting 
and  fishing,  as  well  as  agriculture,  more  produc- 
tive by  providing  them  with  better  implements.  But 
this  is  only  one  phase  of  the  advantage  of  a  division 
,^  of  labor. 

>»  But  it  is  scarcely  possible  to  conceive  of  a  tran- 
sition from  hunting  and  fishing  to  pasturage,  from 
pasturage  to  agriculture,  and  from  agriculture  to 
manufacturing,  without  an  increase  in  the  supply  of 
capital  as  well  as  of  labor.  The  increase  of  capital 
is  an  additional  factor  of  paramount  importance  in 
making  the  more  highly  developed  industrial  state 
remunerative.  If  capital  increases  faster  than  labor, 
—  enough  faster  to  offset  the  growing  scarcity  of 
\  land,  —  the  law  of  diminishing  returns  alone  would 
account  for  an  increased   productiveness  of   labor. 


Diminishing  Returns  loi 

But  if  the  increase  of  labor  were  not  uniform,  some 
kinds  increasing  more  rapidly  than  others,  the  pro- 
ductiveness per  unit  of  those  kinds  which  increased 
more  rapidly  would  necessarily  decline  relatively  to 
that  of  those  kinds  which  increased  less  rapidly. 
Other  factors  might  enter  in  to  make  the  productive- 
ness of  the  former  class  as  high  as  ever,  speaking 
absolutely  ;  but  nothing  could  prevent  its  declining 
relatively  to  that  of  the  latter  class  except  a  radical 
change  in  the  system  of  industry,  which  would  call 
for  a  more  than  proportional  increase  in  the  former 
class  of  labor.  This  is  in  accordance  with  our  exten- 
sion of  the  law  of  diminishing  returns,  and  is  that 
phase  of  the  law  represented  by  formula  IX.  This 
phase  of  the  law  has  an  important  bearing  upon  the 
question  of  differences  of  wages  in  different  occupa- 
tions, which  will  be  more  fully  discussed  in  the 
chapter  on  Wages. 

COLLATERAL  READING 

N.  W.  Senior,  Political  Economy,  pp.  81-86. 

J.  R.  Commons,  The  Distribution  of  Wealth,  Chapter  III. 

C.  J.  Bullock,  The  Variation  of  Productive  Forces,  Quarterly 

Journal  of  Economics,  August,  1902. 
C.  W.  MiXTER  (a  comment  on  the  above  article),  Quarterly 

Journal  of  Economics^  February,  1903. 


CHAPTER  III 
THE  FORMS  OF  WEALTH   AND  INCOME 

There  are  a  great  many  things  in  the  world  about 
us  to  which  we  are  economically  indifferent,  although 
they  are  absolutely  necessary  for  our  existence. 
We  do  not  care  to  own  or  to  possess  them  exclu- 
sively, for  the  sole  reason  that  they  are  so  abundant 
that  no  one  needs  to  give  himself  any  concern  about 
getting  them.  There  is  enough  to  go  around  and  to 
abundantly  satisfy  all  who  need  them ;  consequently 
they  have  no  value  and  are  not  classified  as  wealth. 
Since  the  supply  is  so  great  that  every  one  has  all 
that  he  wants,  no  one  could  sell  any  portion  which 
he  might  appropriate.  No  one  would  want  that 
particular  portion  when  he  already  had  enough  of 
the  same  thing.  Since  it  is  not  necessary  to  econo- 
mize in  their  use,  they  are  not  economic  goods,  or 
wealth. 

But  all  appropriable  things  which  are  scarce 
enough  to  leave  some  wants  unsatisfied  are,  in  the 
time  and   place  where  they  are  wanted,   economic 

I02 


The  Forms  of  Wealth  and  Income     103 

goods.  Men  have  to  economize  in  the  use  of  such 
things.  Since  there  are  not  enough  to  go  around, 
men  must  compete  with  one  another  for  their 
possession.  The  civilized  mode  of  competing  for 
such  things  is  to  bid  for  them,  offering  other  goods 
or  services  in  exchange  for  them.  Therefore  they 
have  value,  and  they  figure  on  the  market.  Each 
unit  of  such  a  commodity  is  wanted  by  some  one 
whose  well-being,  as  he  conceives  it,  will  be  im- 
proved by  the  possession  of  it.  Of  the  former  class . 
of  non-economic  goods  it  can  not  be  said  that  any 
individual  considers  that  his  well-being  would  be 
improved  by  the  ownership  or  possession  of  any 
specific  unit,  though  of  course  his  well-being  may 
depend  absolutely  upon  the  existence  of  such  things 
in  a  general  sense.  As  stated  in  a  previous  chapter, 
though  men  could  not  live  at  all  without  air,  yet 
any  particular  cubic  yard  might  easily  be  dispensed 
with.  No  one's  well-being  depends  in  the  slightest 
degree  upon  its  possession.  On  the  other  hand,  men 
could  live  comfortably  if  there  were  no  such  thing 
as  gold.  But  gold  adds  something  to  the  gratifica- 
tion of  mankind,  and  its  supply  is  so  limited  that 
every  individual  ounce  is  wanted  and  will  contribute 
something  to  some  one's  well-being,  as  he  under- 
stands it. 

Our  first  distinction,   therefore,   is   that  between 


I04  The  Distribution  of  Wealth 

economic  and  non-economic  goods.]  The  formgy--^ 
constitute  wealth,  and  with  them  the  econQnnst_js 
concerned/^TTr^fact,  man's  chief  concern  in  this 
world  is  with  this  class  of  goods.  He  finds  himself 
out  of  harmony  with  his  environment  in  that  he 
has  needs  which  his  natural  environment  does  not 
supply.  As  with  every  species,  his  chief  struggle  is 
that  for  adaptation.  The  human  struggle  for  adap- 
tation takes  the  form  of  a  vast,  united  effort^to 
increase  the  supply  of  those  things  whereof  nature 
has  provided  an  insufficient  supply.  That  is  what 
industrial  civilization  means. 


Some  economic  gojods .  yield-.. Jip.  their  utilities 
directly  to  their  possessors^  and  are  called  consum- 
ers' goods.  They  include  such  things  as  food  and 
clothing  in  the  hands  of  their  consumers,  dwelling 
houses,  landscape  gardens,  pleasure  vehicles,  etc. 
Such  things  do  not  transmit  utilities  to  other  things ; 
they  transmit  them  directly  to  persons.  They  do  not 
have  to  be  transported  or  transferred  in  order  to 
serve  the  purpose  of  their  possessors;  they  are 
themselves  enjoyed,  or  they  give  direct  satisfaction 
to  their  users.  Other  goods  yield  up  their  utilities 
only  indirectly  to  their  possessors  and  are  called 
producers'  goods.  They  include  tools  and  machines, 
farm  lands  and  business  sites,  money,  raw  materials, 

^  As  distinguished  from  their  owners. 


The  Forms  of  Wealth  and  Income      105 

and  merchants'  stocks,  even  when  these  consist  of 
things  which  are  destined  ultimately  for  consump- 
tion. All  such  goods  have  to  be  used  in  producing 
or  imparting  utilities  to  other  goods,  or  to  be  trans- 
formed or  exchanged,  in  order  to  answer  the  pur- 
poses of  their  possessors.  They  are  not  themselves 
enjoyed;  they  give  satisfaction  only  indirectly 
through  the  medium  of  other  goods  which  they 
enable  their  possessors  to  secure  either  through 
production  or  exchange. 

All  the  material  wealth  of  the  community  may  be  ^ 
divided  into  these  two  classes, — 'jconsumers'  goods, 
yielding  utilities  directly  to  their  possessors,  and 
.producers'  goods,  yielding  utilities  indirectly  to  their 
possessors.  The  fact  that  some  things  may  be 
partly  consumers'  and  partly  producers'  goods,  or 
consumers'  goods  at  one  time  and  producers'  goods 
at  another,  —  like  the  musician's  instrument,  which 
is  used  both  to  beguile  his  time  and  to  earn  his  living, 
—  does  not  destroy  the  validity  of  this  classification. 
The  distinction  is  quite  as  clear  as  that  between 
plants  and  animals,  or  as  that  between  houses  and 
barns,  or  men  and  boys.  No  one  would  deny  the 
validity  of  the  distinction  between  houses  and  barns 
simply  because  some  buildings  were  difficult  to 
classify. 

Some  goods  yield  up  their   utilities  directly,  and 


1 06  The  Distribution  of  Wealth 

others  only  indirectly,  to  their  owners}  The  former 
include  such  consumers*  goods  as  are  used  by  their 
owners  for  their  own  direct  satisfaction,  and  are  not 
loaned,  rented,  or  hired.  The  latter  include  all  pro- 
ducers' goods  and  such  consumers'  goods  as  are  not 
used  by  their  owners,  but  are  loaned,  rented,  or 
hired.  All  goods  of  this  latter  class,  whether  they 
be  producers'  or  consumers'  goods,  hold  the  same 
relation  to  their  owners  that  producers'  goods  do  to 
their  possessors.  Their  owner  prizes  them  not  for 
their  own  sakes,  but  for  the  sake  of  the  other  goods, 
or  the  income,  which  they  enable  him  to  secure.  To 
this  class  of  goods  the  name  capital  is  generally 
applied  by  the  world  at  large,  though  economists 
have,  for  special  reasons  which  will  be  given  later, 
excluded  land  and  natural  agents. 

That  part  of  capital  which  consists  of  producers* 
goods  is  sometimes  called  productive,  and  sometimes 
social,  capital;  while  that  part  which  consists  of  con- 
sumers' goods  is  sometimes  called  acquisitive,  as  dis- 
tinguished from  productive,  and  sometimes  private, 
as  distinguished  from  social,  capital  : 

The  following  figure,  in  which  capital  is  shown  to 
include  producers'  goods  and  all  income-bearing  con- 
sumers' goods,  will  serve  to  illustrate  the  chief  sub- 
divisions of  material  wealth  :  — 

1  As  distinguished  from  their  possessors. 


The  Forms  of  Wealth  and  Income      107 

MATERIAL    WEALTH 


CONSUMERS' 


GOODS. 


NON-INCOME-BEARING 
CONSUMERS' GOODS. 


CAP 


ACQUISITIVE 
CAPITAL. 


PRODUCBR^ 

GOODS/ 


ITAL. 


PRODUCTIVE  CAPITAL, 


/ 


LAND    ^ND  NATURAL  A  GENTS. 


The  reasons  usually  given  for  separating  land  from 
other  goods  and  treating  it  in  a  class  by  itself  are : 
first,  that  land  is  a  free  gift  of  nature,  whereas  other 
goods  are  produced  by  human  effort;  second,  that 
land  can  not  be  reproduced  or  increased  in  supply, 
and  there  is  no  limit  therefore  to  its  increase  in  value, 
whereas  other  goods  can  not  rise  to  a  value  much 
above  that  which  will  tempt  men  to  undertake  their 
production,  that  is,  their  value  can  not  rise,  for  any 
long  time,  much  above  what  it  costs  to  produce  them ; 
third,  laund^does  not  go  out  of  existence,  whereas 
other  goods  are  continually  wearing  out  and  having 
to  be  replaced  by  new  ones.     All  these  distinctions 


io8  The  Distribution  of  Wealth 

are  valid  and  important,  when  properly  understood, 
but  they  are  capable  of  being  misunderstood  and 
also  of  being  greatly  exaggerated. 

To  the  first  distinction  it  may  be  objected  that 
other  goods  are,  in  their  original  form,  free  gifts  of 
nature  as  truly  as  land.  The  only  basis  of  a  man's 
claim  to  them  is  that  he  appropriated  them  and 
changed  their  form  to  suit  his  own  or  some  one  else's 
purpose,  —  that  is,  he  put  them  into  a  form  which  was 
valuable.  The  same  is  true  of  land,  and  it  is  this 
aspect  of  the  case  which  would  naturally  appeal,  and 
did  as  a  matter  of  fact  appeal,  to  the  first  settlers  in 
a  new  community.  If  one  settler  saw  a  tree  which 
seemed  to  contain  possibilities,  and  chopped  it  down 
and  made  it  into  a  table,  it  would  be  in  accordance 
with  social  utility  that  the  table  should  be  his.  If 
another  settler  saw  a  piece  of  land  which  seemed  to 
contain  possibilities,  and  cleared  it  and  ploughed  it  and 
reduced  it  to  cultivation,  on  the  same  reasoning  the 
land  would  be  his.  Each  settler  would  have  found  a 
free  gift  of  nature,  each  would  have  worked  upon  it, 
each  would  have  changed  its  form  from  the  raw  state 
in  which  he  found  it  to  a  form  which  would  serve  his 
purpose.  The  mere  fact  that  the  result  of  one's 
labor  happened  to  be  a  farm,  and  that  of  the  other's 
labor  a  table,  would  not  have  appeared  at  the  time 
to  be  a  real  difference.     This  aspect  of  the  easy  is 


The  Forms  of  Wealth  and  Income     109 

recommended  to  the  consideration  of  those  who 
believe  that  the  private  ownership  of  land  is  for- 
bidden by  a  moral  law  ordained  from  the  foundation 
of  the  world. 

If,  however,  the  community  should  grow  in  popu- 
lation, a  real  difference  between  the  table  and  they 
land  would  begin  to  appear.  In  the  first  place,  it 
would  be  found  that  the  owners  of  the  land  held  con- 
trol of  the  original  raw  material  for  the  manufacture 
of  tables  and  all  other  produced  goods.  When  the 
maker  of  the  first  table  wished  to  make  a  new  one  to 
replace  the  old  one  when  it  was  worn  out,  he  would 
have  to  pay  the  landowner  for  the  privilege  of  cut- 
ting a  tree  from  which  to  make  it.  In  the  second 
place,  the  value  of  the  land  would  increase  in  propor- 
tion to  the  number  of  persons  wishing  to  make  use  of 
its  products  either  for  purposes  of  consumption  or 
for  the  purpose  of  producing  other  goods.  The 
fortunate  owners  of  the  limited  supply  of  land  would 
find  themselves  in  possession  of  a  growing  income 
far  in  excess  of  anything  which  the  land  may  have 
cost  them,  whereas  the  owners  of  the  tables  and 
other  such  goods  would  find  themselves  always  com- 
pelled to  expend  approximately  as  much  in  the  mak- 
ing of  them  as  they  were  worth.  As  time  goes  on 
this  difference  increases,  especially  in  a  growing  city, 
until  small  areas  of   land   come  to  have    fabulous 


no  The  Distribution  of  Wealth 

prices,  while  the  value  of  tables  continues  to  bear  a 
fairly  close  relation  to  their  cost  of  production. 

To  the  second  distinction  it  may  be  objected  that 
lland  is  sometimes  "  made "  in  the  sense  of  being 
reclaimed  from  the  sea  or  the  desert,  whereas  there 
are  other  goods,  such  as  antique  furniture  and  rare 
works  of  art,  which  can  not  now  be  reproduced.  But 
the  fact  remains  that  by  far  the  greater  part  of  the 
present  land  supply  is  not  "  made."  In  fact,  there  is 
not  enough  "  made  "  to  have  any  appreciable  effect 
on  the  value  of  land  in  general,  and  it  certainly  does 
not  prevent  certain  choice  situations  from  rising  to 
stupendous  prices.  On  the  other  hand,  with  few 
exceptions,  other  goods  are  capable  of  reproduction, 
and  are  actually  reproduced  so  long  as  they  have  a 
value  high  enough  to  repay  the  cost  of  production. 
Whereas  non-reproducible  land  is  the  rule  and 
reproducible  land  the  exception,  reproducible  goods 
of  other  kinds  than  land  are  the  rule  and  non-repro- 
ducible ones  the  exception.  This  may  be  called  a 
difference  of  degree  only,  but  the  difference  of 
degree  is  so  great  as  to  constitute,  for  scientific 
and  practical  purposes,  a  difference  of  kind.  As  a 
matter  of  fact,  nearly  all  scientific  differences  are 
differences  of  degree.  It  is  not  denied,  however, 
that  there  are  many  resemblances  between  land  and 
other  goods.     There   are  also  certain  resemblances 


The  Forms  of  Wealth  and  Income      iii 

between  a  man  and  a  clothes-pin,  but  the  differences 
are  sufficiently  important  to  warrant  our  placing 
them  in  different  classes. 

Again,  it  may  be  urged,  the  process  of  producing 
some  other  goods  is  so  slow  as  to  give  the  owners 
of  the  existing  supply,  in  a  time  of  rising  demand, 
all  the  advantages  which  come  from  the  ownership 
of  land.  That  is,  the  work  of  increasing  the  supply 
to  meet  the  new  demand  is  so  slow  that  the  exist- 
ing supply  may,  for  a  considerable  time,  command 
a  price  far  above  its  cost  of  production.  But  the 
same  reply  can  be  made  to  this  objection  as  to  the 
last.  It  compares  a  temporary  and  exceptional 
characteristic  of  these  other  goods  with  a  normal 
and  permanent  characteristic  of  land. 

To  the  third  distinction  a  somewhat  stronger  ob- 
jection can  be  urged.  Though  land  itself,  consid- 
ered as  a  whole,  is  indestructible,  certain  properties 
of  the  land,  which  are  sometimes  important  elements 
in  its  value,  are  destructible.  The  chemical  and 
physical  properties  which  give  fertility  to  the  soil 
are  constantly  being  worn  out  and  replaced.  Their 
preservation  requires  as  much  intelligence  and  fore- 
sight, and  as  much  sacrifice,  as  the  preservation  of 
the  stock  of  any  other  kind  of  goods.  This  has  led 
some  writers  to  exclude  the  soil  from  the  definition  of 
land,  narrowing  it  down  to  merely  space,  location. 


1 1 2  The  Distribution  of  Wealth 

and  support,  —  the  properties  which  give  it  value  in 
cities,  which  properties  are  also  indestructible  and 
non-reproducible.  But  this  seems  Uke  an  unreal  and 
unnecessary  refinement.  Besides,  it  is  not  essential 
that  land  should  be  absolutely  unlike  other  goods 
in  every  particular  in  order  to  justify  its  being 
placed  in  a  class  by  itself.  The  fact  that  space, 
location,  and  support,  —  properties  of  land  which 
can  not  be  produced  nor  destroyed  by  individual 
effort,  —  are  important  factors  in  its  value,  is  suffi- 
cient to  distinguish  it  from  other  goods,  even  though 
it  possesses  some  properties  in  common  with  them. 
However,  it  must  be  admitted  that  where  the  fer- 
tility of  the  soil  is  the  principal  factor  in  the  value 
of  land,  and  the  indestructible  properties  of  minor 
importance,  there  is  less  reason  for  the  distinction 
than  exists  when  these  properties  grow  to  paramount 
importance  and  the  fertility  of  the  soil  becomes  a 
minor  factor.  Thus,  in  a  new  and  sparsely  set- 
tled community  where  the  land  is  used  mainly 
for  agriculture,  and  where  space  has  not  yet  be- 
come appreciably  scarce,  land  differs  less  from 
other  goods  than  it  does  in  an  old  and  densely 
populated  community,  especially  in  a  large  city, 
where  space  and  location  are  everything,  and  the 
fertility  of  the  soil  counts  for  little  or  nothing. 
Another   curious   objection,  which   applies  to   all 


The  Forms  of  Wealth  and  Income     113 

three  distinctions  alike,  is  that  while  land  surface  Js. 
a  free  gift  of  nature,  land  capital  is  not,  but  is  pro- 
duced and  destroyed  precisely  as  other  forms  of  capital 
are ;  that  those  who  speak  of  land  as  though  it  were 
mere  land  surface  are  guilty  of  identifying  a  geo- 
graphical with  an  economic  conception;  that  eco- 
nomic land,  or  land  capital,  has  to  be  fashioned  out 
of  land  surface  just  as  other  forms  of  capital  are 
fashioned  out  of  materials  which  nature  affords ; 
and  that  though  the  land  surface  of  the  globe  may 
not  be  materially  increased,  land  capital  may  be 
indefinitely  increased^.  Now  land  capital  can  not 
possibly  mean  anything  else  than  land  value,  since 
it  is  used  in  a  way  which  excludes  improvements 
placed  on  the  land  such  as  buildings  and  fences. 
But  to  argue  that  though  land  surface  may  not  be 
increased,  land  value  may,  is  to  beg  the  whole 
question.  One  might  as  well  say  that  during  the 
supposed  coal  famine  of  the  winter  of  1 902-1 903, 
it  was  not  coal  in  the  economic  sense,  but  only  in 

1  Cf.  the  paper  by  Professor  Carl  C.  Plehn,  read  before  the  Massa- 
chusetts Single  Tax  League,  December  8,  1902.  The  same  reasoning 
seems  to  underlie  the  objections  of  Professors  J.  B.  Clark  ("The  Distri- 
bution of  Wealth,"  N.Y.,  1900)  and  Frank  A.  Fetter  ("The  Relations 
between  Rent  and  Interest,"  Publications  of  the  American  Economic 
Association,  3d  Series,  Vol.  V,  No.  I,  Part  I),  since  both  identify  land 
with  the  other  agents  of  production,  and  use  the  term  "  capital "  to 
signify  the  value  contained  in  all  such  goods. 
I 


"Nl 


114  The  Distribution  of  Wealth 

the  material  sense,  which  was  scarce ;  that  though 
there  were  few  coal-tons  there  was  much  coal-value ; 
and  that  therefore  there  was  as  much  coal,  in  the 
economic  sense,  as  ever :  but  that  would  be  a 
travesty  on  the  science  of  economics. 

An  objection,  hardly  less  curious,  is  that  under 
static  conditions  the  supply  of  other  forms  of  capital 
is  as  fixed  as  that  of  land.  At  any  given  instant, 
when  the  conditions  of  supply  and  demand  are  in  a 
state  of  equilibrium,  it  is  as  impossible  to  increase  the 
supply  of  other  goods  as  it  is  to  increase  the  supply 
of  land.^  This  implies  an  admission  that  if  time 
were  given  the  supply  of  other  things  is  more  vari- 
able than  that  of  land ;  but,  it  is  claimed,  that  would 
destroy  the  assumed  static  conditions.  All  this  may 
be  quite  true ;  but,  aside  from  the  doubtful  utility  of 
so  heroic  an  assumption  as  that  of  a  static  state, 
there  is  the  undoubted  fact  that  if  land,  in  such  a 
static  state,  has  any  value  at  all,  that  assumed  static 
state  must  have  been  preceded  by  a  dynamic  state  in 
which  the  value  of  the  land  rose  from  nothing  — 
being  a  free  gift  of  nature  —  to  its  present  level, 
through  its  growing  scarcity  and  not  through  the 
labor  of  its  owners.  Even  in  the  static  state,  there- 
fore, land  differs  from  other  goods  in  that  its  value 
bears  very  little  if  any  relation  to  its  cost  of  produc- 

1  Cf.  J.  B.  Clark,  "The  Distribution  of  Wealth,"  p.  338. 


The  Forms  of  Wealth  and  Income     115 

tion,  being  due  to  sheer  scarcity  which  human  labor 
could  not  materially  alleviate. 

There  are,  however,  certain  ways  by  which  the 
scarcijy_of^  land  is  alleviated  when  the  pressure 
becomes  great  enough  to  furnish  the  inducement. 
In  the  first  place,  though  more  land  can  not  T>e 
brought  into  theoDmmunitv.  a  part  of  the  population 
Xycan  move  out  into  the  frontiers  of  civilization,  thus 
s^  enabling  a  given  number  of  people  to  make  use  of 
more  land.  ^  In  the  second  place,  improved  transpor- 
tation  facilities  may  enable  a  given  community  to 
draw  its  subsistence  from  a  larger  area.  In  the 
thipd  place,  a  more  intensive  use  of  the  land  may 
enable  a  given  number  of  people  to  get  along  with 
less  land  than  would  otherwise  be  necessary.  But 
none  of  these  methods,  nor  all  combined,  have  been 
able  to  alleviate  the  scarcity  sufficiently  to  prevent 
land  from  rising  to  enormous  values  in  thickly  popu- 
lated centres. 

Another  distinction,  or  supposed  distinction,  be- 
tween land  ^jid  other  forms  of  productive  wealth  or 
capital  is  based  upon  a  supposed  difference  in  the 
laws  which  determine  the  incomes  from  the  two 
^  sources.  It  is  held,  for  example,  that  the  income 
)  from  capital  is,  or  tends  to  be,  a  uniform  rate  in  the 
same  market,  whereas  there  is  no  uniform  rate  of 
rental  for  land.     The  interest  on  a  given  amount  of 


ii6  The  Distribution  of  Wealth 

capital  is   a  uniform    percentage  of    its    principal, 
whereas  the  rent  of  a  given  piece  of  land  is  deter- 

>mine(ilby  the  difference  between  that  which  it  will 
proSuce  and  that  which  the.  same  amount  of  labor 
and  capital  can  produce  on  the  poorest  land  in  culti- 
vation, which  may,  it  is  assumed,  be  had  for  nothing. 
^N^v^  While  all  this  is  true  enough,  it  does  not  constitute  a 
real  difference  because  the  comparison  is  not  valid. 
The  same  basis  of  measurement  is  not  adhered  to  in 
both  cases,  land  being  measured  on  the  basis  of 
superficial  area  and  its  quantity  expressed  in  acres, 
whereas  capital  is  measured  on  the  basis  of  value 
and  its  quantity  expressed  in  terms  of  dollars. 
Measured  on  the  basis  of  value  and  expressed 
in  terms  of  dollars,  land  earns  a  uniform  percentage 
of  itself  as  truly  as  does  capital.  Measured  on  any 
other  basis,  or  considered  as  individual  pieces  of 
matter,  neither  land  nor  capital  earns  a  percentage 
(  of  itself.  Where  a  dollar's  worth  of  capital  earns 
->\  five  per  cent,  a  dollar's  worth  of  land  will  also  earn 
five  per  cent. 

Whenever  a  person  has  in  mind  the  income  from  a 
definite  piece  of  property,  whether  it  be  land  or  not, 
he  usually  speaks  of  it  as  rent ;  but  when  he  thinks 
of  the  same  income  as  derived  from  a  quantity  of 
wealth,  measured  on  the  basis  of  value,  he  invariably 
speaks  of  it  as  interest,  though  he  will  sometimes 


The  Forms  of  Wealth  and  Income     117 

distinguish  between  gross  and  net  interest,  ^grqss 
interest  being  the  whole  income  and  net  interest 
being  what  is  left  after  allowing  for  insurance, 
repairs,  and  deterioration. 

Though  it  is  true  that  one  acre  does  not  neces- 
sarily earn  as  much  as  another,  neither  is  it  true  that 
one  plough,  or  one  horse,  or  one  loom,  earns  as  much 
as  another.  Moreover,  there  are  certain  forms  of  no- 
rent  capital  as  well  as  no-rent  land;  there  are 
machines  and  tools  on  the  way  to  the  scrap  heap, 
buildings  that  are  barely  worth  preserving,  and  other 
forms  of  capital  so  poor  that  they  can  be  had  for 
nothing,  or  at  most  for  what  they  are  worth  as  old 
iron  or  lumber.  The  most  that  any  one  would  be 
willing  to  pay  for  a  superior  machine  would  be  the 
difference  between  what  he  could  produce  with  it 
and  the  amount  which  he  could  produce,  by  the 
same  expenditure  of  labor  and  other  capital,  with 
one  of  those  machines  which  he  could  have  for  the 
asking.  At  least,  this  is  as  true  of  machines  as  it  is 
of  land. 

In  order  to  measure  anything  it  is  necessary  to 
abstract  some  one  of  its  properties,  such  as  length, 
or  bulk,  or  weight,  or  some  form  of  energy,  and  com- 
pare it  with  other  things  on  the  basis  of  that  prop- 
erty. Thus  in  measuring  a  string  we  simply  compare 
its  length  with  that  of  something  else,  and  in  meas- 


1 1 8  The  Distribution  of  Wealth 

uring  pig  iron  we  compare  its  weight  with  that  of 
something  else.  In  order  to  express  the  quantity  in 
either  case  we  must  state  the  ratio  which  this  prop- 
erty of  the  thing  in  question  bears  to  the  same  prop- 
erty in  some  other  thing  which  has  been  agreed  upon 
as  a  standard.  Our  idea  of  the  quantity  of  a  thing 
will  depend  largely  upon  the  property  which  is 
selected  as  a  basis  of  measurement  or  comparison. 
If,  for  example,  we  take  a  piece  of  cork  weighing 
one  pound,  and  a  piece  of  lead  weighing  two  pounds, 
and  if  we  choose  to  measure  and  express  quantity 
in  terms  of  weight,  there  would  be  twice  as  much 
lead  as  cork.  But  if  we  were  to  decide  to  measure 
and  express  the  quantities  of  the  same  pieces  in 
terms  of  cubic  contents,  we  should  have  several 
times  as  much  cork  as  lead.  Wealth  has  come  to 
^bejmeasured  on  the  basis  of  that  property  called 
^s^  value.^ 

When  wealth  consisted  mainly  of  flocks  and  herds, 
it  was  customary  for  the  primitive  herdsman  to 
reckon  the  quantity  of  his  wealth  numerically  as  so 

^  The  importance  of  this  conception  of  an  economic  quantity  can 
hardly  be  overestimated.  It  not  only  helps  to  clear  up  the  confusion 
regarding  the  nature  of  capital,  but  it  is  essential  to  the  solution  of  a 
number  of  other  knotty  problems  in  economic  analysis.  When  it  is 
once  understood,  for  example,  that  a  quantity  of  money  is  a  quantity 
of  value,  it  will  become  apparent  at  once  that  very  little  that  has  been 
written  on  the  quantity  theory  of  money  has  hit  the  point. 


The  Forms  of  Wealth  and  Income     119 

many  head,  from  which,  according  to  some  authori- 
ties, we  get  our  words  cattle  and  capital.  But  as  the 
forms  of  wealth  increased  it  was  no  longer  possible 
to  express  their  quantity  in  terms  of  mere  number, 
unless  they  could  all  be  reduced  to  a  common  de- 
nominator. This  was  done  by  reducing  other  forms 
of  wealth  to  cattle  by  saying  that  the  various  articles 
were  worth  so  many  head  of  cattle,  or  that  they  were 
equal  in  value  to  so  many  cattle.  This  was  a  method 
of  measurement  and  of  quantitative  expression  quite 
as  exact  and  definite,  so  far  as  the  logic  of  the 
process  was  concerned,  as  to  say  that  a  certain  lump 
of  matter  weighs  ten  pounds,  which  simply  means 
that  it  possesses  ten  times  as  much  weight  as  a  cer- 
tain other  lump  of  matter  which  has  been  arbitrarily 
chosen  as  a  standard  of  weight.  The  only  essential 
difference  is  that  in  one  case  value,  and  in  the  other, 
weight,  is  chosen  as  the  property  upon  which  to  com- 
pare the  things  to  be  measured.  Value  is  the  basis 
which  is  still  used  for  the  measurement  of  wealth, 
though  the  unit  of  measurement  has  changed  many 
times,  being  now,  in  this  country,  a  piece  of  gold 
nine-tenths  fine  and  weighing  twenty-five  and  eight- 
tenths  grains. 

The  fact  that  capital  is  habitually  measured  on 
the  basis  of  value,  and  its  quantity  expressed  in 
terms  of  some  unit  of   value,  such  as  a  dollar,  has 


I20  The  Distribution  of  Wealth 

led  certain  writers  into  thinking  that  capital  is  value,^ 
which  is  quite  as  great  a  mistake  as  to  assume  that 
coal  is  weight,  or  that  lumber  is  bulk.  However 
difficult  it  might  be  for  the  average  business  man  to 
formulate  a  definition  of  his  concepts,  yet  he  shows, 
under  the  proper  tests,  a  perfectly  clear  idea  of  the 
relation  between  the  things  called  capital  and  their 
quantitative  expression.  When  asked  how  much  capi- 
tal he  has,  he  will  answer:  so  many  dollars,  or  so 
many  dollars'  worth.  This  is  clearly  his  method  of 
expressing  quantity  —  of  answering  the  question :  how 
much }  But  if  asked  in  what  his  capital  consists,  he 
will  enumerate  the  concrete  things  in  his  possession, 
—  the  buildings,  machines,  and  materials  of  various 
kinds,  including  the  cash  on  hand,  thus  showing 
clearly  that  he  cherishes  no  illusions  as  to  the  real 
nature  of  capital.^ 
li  We  are  warranted,  therefore,  in  adhering  to  the 
Ijconception  of  capital  as  concrete,  material  articles, 
1^  ■"■"""-- ^    ' 

1  Cf.  Qark,  "The  Distribution  of  Wealth,"  Chapter  IX,  also  Fetter, 
"  Recent  Discussions  of  the  Capital  Concept,"  Quarterly  Journal  of 
Economics ,  November,  1900. 

2  Professor  Charles  A.  Tuttle  (^Quarterly  Journal  of  Economics  for 
November,  1903)  objects  that  an  inventory  is  the  only  real  quantita- 
tive expression  for  a  body  of  wealth.  On  the  contrary,  there  are  vari- 
ous ways  of  expressing  quantity,  of  which  the  inventory  is  the  crudest. 
One  might  as  well  say  that  the  only  way  of  expressing  the  quantity  of 
a  pile  of  lumber  is  by  writing  an  inventory  of  the  pieces  contained 
in  it. 


The  Forms  of  Wealth  and  Income     121 

produced  by  human  effort,  and  used  by  their  owners  / 
for  the  purpose  of  securing  an  income.  Such  arti- 
cles are  continually  being  produced,  worn  out  and 
reproduced  more  or  less  rapidly,  which  means  that 
capital  itself,  which  is  merely  a  group  name  for  such 
things,  is  also  undergoing  these  processes.^  Its 
quantity,  however,  is  habitually  expressed  in  terms 
of  value;  but  in  this  it  does  not  differ  absolutely 
either  from  land  or  from  non-income-bearing  con- 
sumers' goods,  since  all  forms  of  wealth  may  be 
measured  and  quantitatively  expressed  in  the  same 
way.  The  fact  that  the  quantity  of  land  may  be 
expressed  in  dollars  does  not  identify  land  with 
capital  any  more  than  the  fact  that  all  forms  of  con- 
sumers' wealth  may  be  similarly  measured  identifies 
them  also  with  capital.  Nevertheless,  it  is  some- 
times more  convenient,  when  speaking  of  the  amount 
of  capital  in  one's  business,  to  include  land  rather 
than  to  make  a  separate  statement  of  its  value. 
But  this  does  not  obscure  the  real  differences,  al- 
ready pointed  out,  between  land  and  produced  goods. 
Moreover,  land  is  more  often  measured  in  acres 
than  in  dollars,  and  the  income  from  it  is  more  often 
conceived  as  rent   than   as  interest,   whereas   other 

1  Professor  Clark  {op.  cit.),  who  distinguishes  between  capital  and 
capital  goods,  holds  that  capital  is  indestructible,  though  capital  goods 
perish. 


122  The  Distribution  of  Wealth 

goods,  for  lack  of  a  common  physical  basis  of  meas- 
urement, are  more  frequently  measured  in  dollars 
than  in  any  other  way,  and  the  income  from  them 
is  consequently  more  often  conceived  as  interest 
than  as  rent.  But  popular  usage  does  not  adhere 
strictly  to  any  one  meaning,  for  either  rent  or  inter- 
est, as  we  shall  see  later. 

Goods  of  different  kinds  differ  greatly  in  the 
(length  of  time  it  takes  them  to  yield  up  their  utilities, 
whether  directly  or  indirectly,  to  their  possessors. 
Some  yield  them  up  quickly,  almost  instantaneously, 
while  others  yield  them  up  slowly,  furnishing  a  flow 
of  utilities  over  a  considerable  period  of  time.  A 
piece  of  confectionery,  for  example,  or  a  bunch  of 
firecrackers,  yields  up  all  its  gratification  in  a  few 
blissful  seconds,  whereas  a  well-built  house  furnishes 
a  continuous  flow  for  a  century  or  more,  and  a  piece 
of  land  for  an  indefinite  period.  Between  these  ex- 
tremes there  is  every  conceivable  variation.  In  the 
case  of  goods  which  last  long  enough  to  make  it 
worth  while  to  do  so,  the  world  has  learned  to  evalu- 
ate the  flow  of  utilities  which  come  from  them  dur- 
ing a  given  time,  in  addition  to  evaluating  the  goods 
themselves.  The  house,  for  example,  or  the  land, 
will  not  only  sell  outright,  but  it  will  rent, — that  is,  the 
utilities  which  it  will  furnish  during  a  given  time  will 
also  sell  for  a  price.     The  same  is  true  of  anything 


The  Forms  of  Wealth  and  Income     123 

else  whose  consumer  or  user  can  not  extract  all  its 
utilities  in  a  short  time.  This  includes  all  land  and 
a  number  of  other  durable  goods. 

In  popular  usage,  the  word  "rent"  is  commonly 
restricted  to  the  price  which  the  owner  receives  for 
the  use  of  a  thing  of  this  class  when  it  is  loaned, 
rented,  or  hired  to  another.  But  a  term  is  also 
needed  for  the  income  which  the  owner  receives 
when  he  himself  makes  use  of  the  article  instead  of 
letting  it  out  to  another.  The  word  "  income  "  is  re- 
stricted to  money  or  other  material  goods,  and  does 
not  include  the  flow  of  utilities  which  come  directly 
from  the  use  of  such  an  article.  Thus  the  dwelling 
house  in  which  the  owner  himself  lives  does  not 
furnish  him  an  income,  but  the  one  which  he  rents 
to  another  man  does.  Though  each  house  furnishes 
him  a  flow  of  utilities,  one  furnishes  them  directly, 
whereas  the  other  furnishes  them  indirectly  in  the 
form  of  other  goods.  But  a  piece  of  durable  pro- 
ducers' goods  also,  such  as  a  plough  or  a  loom,  fur- 
nishes an  income  rather  than  a  flow  of  direct  utilities, 
even  when  used  by  the  owner  himself.  If  the  term 
"rent"  is  to  cover  the  income  which  such  an  article 
furnishes  to  its  owner  when  it  is  loaned,  rented,  or 
hired,  the  same  term  might  as  well  be  used  to  cover 
the  income  derived  from  its  use  by  the  owner  him- 
self, since  there  is  no  essential  economic  difference 


124  The  Distribution  of  Wealth 

between  them.  However,  the  term  "  rent "  is  almost 
never  used  in  this  extended  sense. 

For  a  large  proportion  of  income-bearing  goods  it 
is  not  possible  to  separately  evaluate  their  flow  of 
utilities.  The  coal  which  is  consumed  under  a  boiler 
can  not  be  rented,  because  its  flow  of  utilities  is  so 
speedily  exhausted  that  it  would  be  impracticable  to 
evaluate  them  for  any  given  period.  The  same  is 
true  of  the  money  in  the  business  man's  cash  drawer. 
Though  it  is  as  necessary  as  the  coal  to  the  running 
of  his  business,  and  is  a  means  of  securing  an  in- 
come, yet  it  serves  his  purpose  once  and  for  all,  and 
then  only  when  he  is  in  the  act  of  parting  with  it. 
But  a  certain  quantity  of  coal  or  money  may  be 
loaned,  rented,  or  hired  on  the  understanding,  not 
that  the  same  coal  or  money,  but  that  the  same 
quantity  of  coal  or  money,  should  be  returned  with 
something  additional  to  pay  for  the  loan.  This  ad- 
ditional sum  is  never  spoken  of  as  rent,  but  usually 
as  interest.  When  that  which  is  paid  for  the  loan 
and  that  which  is  loaned  are  both  reduced  to  the 
same  quantitative  expression,  both  being  measured  in 
terms  of  value,  one  is  a  ratio  or  a  percentage  of  the 
other.  It  has  therefore  become  customary  to  con- 
tract for  a  certain  rate  or  percentage  of  payment 
instead  of  a  definite  number  of  dollars. 

All  that  was  said  of  coal  and  money  can  be  re- 


The  Forms  of  Wealth  and  Income     125 

peated  of  merchants,  stocks,  and  of  raw  materials 
and  finished  goods  in  the  hands  of  manufacturers. 
Some  of  these  goods  may,  when  completed  and 
serving  their  ultimate  purpose  in  the  hands  of  their 
final  users,  furnish  a  sufficiently  prolonged  flow  of 
utilities  to  enable  them  to  be  rented.  But  in  their 
present  stage,  their  income-bearing  capacity  is  of  a 
different  kind.  Each  individual  article  serves  its^ 
present  owner's  purpose  once  for  all,  and  by  one  act, 
as  it  were,  adds  a  definite  sum  to  his  income.  But 
certain  quantities  of  such  articles  may  be  loaned, 
rented,  or  hired,  as  in  the  case  of  coal  or  money. 
The  income  from  the  loan  of  all  such  goods  is  never 
called  rent,  but  is  always  called  interest.  But  if  the 
word  "interest"  is  to  cover  the  income  from  the  loan 
of  such  things,  the  same  term  might  as  well  be  ap- 
plied also  to  the  income  which  the  owner  derives  from 
them  when  he  uses  them  himself  in  his  own  busi- 
ness, since  there  is  no  essential  economic  difference 
between  them. 

We  have,  therefore,  a  possible  division  of  income- 
bearing  goods  into  two  classes  ^ :  first,  durable  goods 
which  furnish  their  present  possessors  a  flow  of  utili- 

^  This  is  essentially  the  old  distinction  between  fixed  and  circulat- 
ing capital,  except  that  land  is,  for  the  present,  not  excluded,  and  that 
the  basis  of  the  distinction  is  not  the  same.  It  is  also  practically  the 
same  as  the  lawyer's  distinction  between  fungible  and  non-fungible 
goods. 


126  The  Distribution  of  Wealth 

ties  over  a  considerable  time.  This  class  includes 
such  things  as  land,  buildings,  machinery,  draft  ani- 
mals, and  vehicles,  all  of  which,  when  serving  their 
ultimate  purpose,  may  be  rented  as  individual  articles, 
because  their  utilities  during  a  given  time  can  be 
evaluated  as  well  as  the  things  themselves.  Second, 
perishable  goods,  and  those  also  which  serve  the  pur- 
poses of  their  present  possessors  by  a  single  act,  or 
in  a  brief  period  of  time.  This  class  includes  such 
things  as  food,  fuel,  horse-feed,  stock  in  trade,  and 
money,  none  of  which  can  be  rented  as  individual 
articles,  but  can  be  hired  by  the  quantity.  When 
they  are  so  hired,  the  sum  which  is  paid  for  their  use 
is  never  called  rent,  but  usually  interest,  at  least 
where  it  has  become  customary  to  measure  wealth  in 
terms  of  some  unit  of  value,  such  as  a  dollar.  Fol- 
lowing out  this  classification,  we  might  divide  the 
incomes  of  the  owners  of  all  such  goods  into  two 
classes,  called  rent  and  interest,  rent  being  that 
derived  from  the  ownership  of  goods  of  the  first 
class  and  interest  that  derived  from  the  ownership  of 
those  of  the  second  class.  At  least  there  is  a  certain 
popular  sanction  for  such  a  classification.  Neverthe- 
less the  income  from  the  first  class  of  goods  is  some- 
times called  interest  also,  when  they  are  reduced  to 
terms  of  value,  but  that  derived  from  the  second 
class  is  never  called  rent.     It  is  therefore  a  mistake 


The  Forms  of  Wealth  and  Income      127 

to  make  the  unqualified  statement,  as  certain  writers 
have  done,^  that  rent  and  interest  are  only  different 
names  for  the  same  income  viewed  from  different 
standpoints.  Such  a  statement  could  be  true  only  of 
incomes  from  the  first  class  of  goods. 

But  this  classification  is  unsatisfactory  for  two 
reasons.  In  the  first  place,  business  practice  does 
not  generally  distinguish  between  goods  of  the  second 
class  and  that  portion  of  the  first  class  which  excludes 
land  and  natural  agents.  The  merchant  regards  his 
shelves,  counters,  desks,  and  cash  carriers  as  parts  of 
the  fund  or  quantity  of  capital  with  which  he  does 
business,  just  as  he  does  the  goods  on  his  shelves  or 
the  cash  in  his  drawer.  If  he  owns  the  buildings, 
they  also  figure  in  the  same  account.  The  manufac- 
turer does  not  distinguish  his  engines  from  the  coal 
which  they  consume,  nor  his  machines  from  the 
materials  which  pass  through  them.  Nor  does  the 
farmer  distinguish  his  machinery  from  his  seed,  nor 
his  horses  from  his  horse-feed.  All  these  things 
are  habitually  classed  together  as  parts  of  the  fund  or 
quantity  of  capital  in  the  various  lines  of  business. 

Even  the  land  is  sometimes  so  treated,  but  not  so 

1  Cf.  Qark,  "Distribution  of  Wealth,"  pp.  123-125,  and  335-337. 
Also,  Fetter,  "  The  Relation  between  Rent  and  Interest,"  Publications 
of  the  American  Economic  Association,  3d  Series,  Vol.  V,  No.  I,  Part  I, 
pp.  182,  186,  194,  196,  and  197. 


128  The  Distribution  of  Wealth 

uniformly.  The  merchant  and  manufacturer  fre- 
quently regard  their  land  as  merely  so  much  capital, 
thinking  of  it  in  terms  of  dollars  rather  than  acres ; 
but  this  is  seldom  done  by  the  farmer,  who  outnum- 
bers them  all.  In  agriculture,  where  most  of  the 
land  is  utilized,  it  is  uniformly  looked  upon  as  a  dis- 
tinct factor  in  production,  —  the  basic  factor  upon 
which  labor  and  capital  are  expended,  —  though 
certain  classes  of  improvements  are  not  always  distin- 
guished from  the  land.  Agricultural  land  is  com- 
monly thought  of  in  terms  of  acres  rather  than  in 
terms  of  dollars.  Practical  life,  therefore,  furnishes 
a  kind  of  sanction  for  including  all  income-bearing 
goods  —  exclusive  of  land  —  under  the  one  class 
called  capital,  whether  they  be  rentable  or  non-rent- 
able. There  is  also,  it  must  be  admitted,  a  certain 
amount  of  usage  in  favor  of  including  land  also,  but 
the  sanction  for  this  is  by  no  means  so  strong.  How- 
ever, popular  usage  is  altogether  too  indefinite  and 
inexact  to  serve  as  a  basis  for  scientific  nomenclature. 
But  since  it  is  desirable  to  keep  as  near  to  popular 
usage  as  is  consistent  with  accuracy,  it  is  enough  to 
point  out  that  popular  usage  is  more  favorable  to  the 
distinction  between  land  and  other  income-bearing 
goods,  including  all  the  latter  under  capital,  than  to 
any  other  distinction. 

In  the  second  place,  there  is  no  important  economic 


The  Forms  of  Wealth  and  Income      129 

difference  between  these  two  classes  of  produced 
goods,  nor  between  the  incomes  derived  from  them ; 
whereas  there  is  a  most  important  economic  differ- 
ence between  all  such  goods  and  land.  The  fact  that 
they  are  all  products  of  human  effort  constitutes  a 
likeness  which  is,  from  the  economic  point  of  view, 
of  vastly  more  importance  than  any  unUkeness  in  the 
method  of  computing  incomes.  And  the  fact  that 
land  is  not  so  produced  constitutes  an  unlikeness 
which  is  more  important  than  any  likeness  in  the 
method  of  computing  incomes.  The  fact  that  they 
are  perishable  and  reproducible,  while  land  is  not,  is 
also  an  important  distinction,  since  this  limits  their 
value  to  something  approximating  their  cost  of  repro- 
duction, whereas  there  is  no  such  limit  to  the  value  of 
land.  These  distinctions  are  important  because  im- 
portant conclusions  as  to  public  policy  depend  upon 
them,  and  economics  can  justify  its  existence  only  by 
throwing  light  upon  questions  of  pubUc  policy.  A 
"ax  on  land,  to  take  a  single  example,  has  a  different 
effect  from  a  tax  on  an  article  which  is  being  pro- 
duced, worn  out,  and  reproduced  by  human  effort. 
A  tax  on  the  latter  class  of  articles  has  the  effect  of 
discouraging  that  effort  and,  consequently,  of  reduc- 
ing the  supply,  whereas  a  tax  on  land  does  not  affect 
the  supply  in  the  same  way  nor  to  the  same  degree. 
It  seems  therefore  that  the  reasons  are  stronger 


^ 


130  The  Distribution  of  Wealth 

in  favor  of  than  against  distinguishing  land  from 
other  income-bearing  goods,  and  including  the 
others  under  the  general  name  of  capital.  This 
may  not  be  satisfactory  to  those  who  require  abso- 
lute differences  between  things  placed  in  different 
classes,  and  absolute  likenesses  among  those  in- 
V^  eluded  in  the  same  class ;  but  economics  is  not 
.  V»  N*  the  field  for  the  exercise  of  such  minds,  for  there 
A^  v  are  no  such  absolute  differences  and  likenesses 
yi'^/t^  \  among  the  things  with  which  this  science  deals. 
We  shall  adhere  to  the  above  distinctions  in  this 
book,  and  shall  discuss  the  income  from  land 
under  the  name  of  rent,  and  the  income  from 
capital  under  the  name  of  interest.  In  doing  this 
we  shall  assume  that  the  quantity  and  the  supply 
of  capital  are  measured  in  terms  of  value  and 
expressed  in  dollars.  Moreover,  the  quantity  of 
capital  in  a  community  is  the  amount,  expressed 
in  dollars,  in  existence  at  any  one  time,  and  not 
the  amount  which  comes  into  being  during  a  period 
of  time,  just  as  the  amount  of  a  business  man's 
capital  is  the  amount  of  goods,  expressed  in  dol- 
lars, which  he  has  in  his  business  at  a  given  in- 
stant of  time,  and  not  the  amount  which  passes 
through    his    hands    during    a    given    period.^      In 

1  This  is  in  harmony  with  the  conception  of  capital  given  us  by 
Professor  Irving  Fisher,  —  viz.,  as  a  stock  of  wealth  existing  at  an  in- 


The  Forms  of  Wealth  and  Income      131 

this  last  particular  we  shall  be  strictly  following  the 
usage  of  the  business  world,  but  we  shall  do  this  with 
our  eyes  open,  knowing  that  capital  is  not  value  but 
concrete  goods,  and  that  the  quantitative  expression 
for  the  thing  is  not  the  thing  itself. 

If  there  is  confusion  and  uncertainty  as  to  the 
exact  meaning  of  rent  and  interest  in  popular 
usage,  there  is  double  confusion  and  uncertainty 
as  to  the  meaning  of  wages  and  profits.  The 
word  "  wages  "  is  frequently  restricted  to  that  which 
is  paid  to  laborers  who  contract  to  work  by  the 
piece,  or  by  the  day,  week,  or  month,  the  word 
"  salary  "  being  applied  to  that  which  is  paid  to  those 
who  contract  to  work  by  the  year.  But  inasmuch 
as  there  is  no  important  economic  difference  be- 
tween the  earnings  of  one  kind  of  labor  and  those 
of  another,  a  term  is  needed  which  will  cover  the 
earnings  of  all  labor  however  they  are  contracted 
for  or  secured.  Economic  writers  have  therefore 
uniformly  used  the  term  "wages"  in  this  broader 
sense,  including  even  the  earnings  of  the  man 
who  works  for  himself  and  whose  wages  come  to 
him  in  the  form  of  the  price  of  a  product. 

stant  of  time  as  distinguished  from  income,  which  is  a  flow  through  a 
period  of  time,  —  except  that  he  includes  all  wealth  instead  of  limiting 
capital  to  income-bearing  goods.  Cf.  "  The  Role  of  Capital  in  Eco- 
nomic Theory,"  Economic  Journal,  December,  1897. 


132  The  Distribution  of  Wealth 

^^he  word  "  profits  "  has  the  most  indefinite  mean- 
ing of  all.  It  is  frequently  used  to  cover  the  dif- 
ference between  the  cash  income  and  the  cash 
outlay  of  a  business.  But  this  makes  no  allowance 
for  the  earnings  of  the  business  man's  own  land 
or  capital.  If  he  has  no  rent  or  interest  to  pay, 
the  surplus  of  receipts  over  payments  will  of 
course  be  greater  than  it  would  be  if  he  were 
doing  business  on  rented  land  or  borrowed  capi- 
tal. But  instead  of  calling  this  all  profits,  it  is 
better  to  separate  it  into  two  or  more  parts,  since 
there  are  important  differences.  That  part  of__the 
surplus  which  results  from  the  ownership  of  land 
ought  to  be  called  rent/'since  it  does  not  differ 
materially  from  that  which  is  received  from  rent- 
ing land  to  another.  Similarly,  and  for  the  same 
reason,  that  part  which  is  due  to  the  ownership  of 
his  own  capital  ought  to  be  called  interest,  and  that 
which  is  due  to  the  fact  that  he  does  part  of  the 
work  himself  instead  of  hiring  all  of  it  ought  to  be 
called  wages.^*^  By  this  process  we  have  eliminated 
three  important  items  from  the  popular  conception  of 
profits.     What  does  this  leave } 

There  are,  at  least,  two  sources  of  income,  which 
can  not  fairly  be  classified  under  any  of  these  three    > 
heads :   first,  the   surplus   gains   of   monopoly ;   and 
second,    the    superior    gains    of     hazardous    enter- 


The  Forms  of  Wealth  and  Income     133 

prises.  These  will  be  discussed  under  the  head 
of  profits,  though  the  term  **  monopoly  "  will  always 
be  prefixed  to  the  former  class. 

COLLATERAL  READING 

J.  S.  Mill,  Principles  of  Political  Economy,  Book  I,  Chapters 
IV-VI. 

W.  S.  Jevons,  Theory  of  Political  Economy,  Chapter  VII. 

Edwin  Cannan,  Theories  of  Production  and  Distribution,  Chap- 
ter IV. 

Irving  Fisher,  What  is  Capital  ?  Economic  Journal,  Vol.  VI, 
p.  509. 

J.  B.  Clark,  The  Distribution  of  Wealth,  Chapters  IX-X. 

F.  W.  Taussig,  Wages  and  Capital,  Chapters  I-III. 

C.  A.  Tuttle,  The  Real  Capital  Concept,  Quarterly  Journal  of 
Economics^  November,  1903. 

F.  A.  Fetter  and  others,  The  Relation  between  Rent  and  In- 
terest, Publications  of  the  American  Economic  Association^ 
3d  Series,  Vol.  V,  No.  II,  Part  I. 


CHAPTER  IV 

WAGES 

"  Labor,  like  all  things  which  are  purchased  and 
sold,  and  which  may  be  increased  or  diminished  in 
quantity,  has  its  natural  and  its  market  price."  Thus 
Ricardo  long  ago  pointed  out  that  wages  came  under 
the  general  law  of  value  and  price.  We  have  al- 
ready seen^  that  the  value  of  any  article  depends 
upon  how  much  it  is  wanted  in  comparison  with 
other  things,  and  we  shall  find  that  wages,  or  the 
value  of  labor,  are  no  exception  to  this  rule.  But 
it  is  doubly  important  that  we  should  here  observe 
the  caution  against  trying  to  explain  the  value  of 
labor  in  general  before  explaining  the  value  of  par- 
ticular units  of  labor.  Besides,  there  are  almost  as 
many  kinds  of  labor  as  of  products,  and  it  would  be 
quite  as  unreasonable  to  try  to  find  a  general  rate  of 
wages  for  labor  as  to  find  a  general  price  for  prod- 
ucts. Labor  in  general  is  not  bought,  but  indi- 
vidual laborers  are  hired  to  do  definite  amounts  of 
work,  to  perform  specific  tasks,  or  to  render  specific 

1  Chapter  I. 
134 


Wages  135 

services.  We  have  first  to  explain  the  value  of  those 
specific  services  before  we  can  arrive  at  any  conclu- 
sion as  to  the  wages  of  labor  in  general.  The 
question  to  be  determined  in  each  case  is :  How 
much  are  those  specific  services  wanted  in  compari- 
son with  other  things  ?  Upon  the  answer  to  this 
question  depends  the  amount  of  those  other  things 
which  the  laborer  will  be  able  to  get  for  his  work. 

Let  us  consider  first  the  example  of  the  laborer 
who,  with  practically  no  cooperation  from  others, 
produces  a  consumable  article  for  sale.  In  such  a 
case  the  amount  of  labor  necessary  to  make  the 
article  is  wanted  just  as  much  as,  and  no  more  than, 
the  article  which  it  makes.  Moreover,  the  whole 
market  value  of  the  article  goes  to  the  laborer  who 
makes  it.  Therefore  it  is  safe  to  say  that  whatever 
determines  the  value  of  the  article  determines  also 
the  value,  or  the  wages,  of  the  labor. 

Let  us  suppose  that  the  laborer  is  gathering  fire- 
wood in  a  primeval  forest  where  it  is  worth  nothing, 
and  carrying  it  to  a  city  where  it  is  worth  something. 
It  is  obvious  that  the  labor  of  gathering  and  market- 
ing each  load  will  be  worth  precisely  as  much  as  the 
load  itself,  and  that  the  laborer's  earnings  during  a 
given  time  will  depend  partly  upon  the  number  of 
loads  he  markets,  and  partly  upon  the  value  of  each 
load.     This  is  equivalent  to  saying  that  his  earnings 


136  The  Distribution  of  Wealth 

depend  upon  the  total  value  which  he  produces,  or 
that  he  gets  just  what  his  labor  is  worth  to  the  com- 
munity. If,  for  any  reason,  a  load  of  fire- wood  is 
not  worth  much  to  the  community,  obviously  the 
labor  which  brings  it  to  market  is  not  worth  much, 
and  vice  versa.  If  under  these  conditions  the 
laborer  is  poorly  paid,  he  can  not  complain  of  the 
injustice  of  society.  If  he  wants  higher  wages  than 
his  labor  is  worth,  he  must  appeal  to  charity  rather 
than  to  justice. 

In  any  community  where  there  is  a  diversity  of 
wants  and  occupations,  some  men  being  engaged  in 
supplying  one  article  and  some  another,  it  may 
happen  that  the  producers  will  be  very  unevenly 
distributed  among  the  various  lines  of  production. 
That  is  to  say,  there  may  be  a  great  many  at 
work  supplying  one  article  and  very  few  supply- 
ing another,  even  though  the  community  wants  as 
much  of  one  as  of  the  other.  This  unevenness  may 
be  due  either  to  natural  or  to  artificial  causes.  By 
natural  causes  are  meant,  principally,  differences  in 
natural  or  inherited  abiUties.  The  supplying  of  one 
article  may  require  only  such  ability  as  the  majority 
of  men  possess,  while  the  supplying  of  the  other 
may  require  a  special  kind  of  ability  such  as  only 
a  few  possess  or  can  acquire.  By  artificial  causes 
are   meant  hindrances   set   up   by  men   themselves, 


Wages  137 

such  as  patents,  monopolies,  trade-union  restrictions, 
or  any  other  regulation  or  restriction  of  human  de- 
vising, whether  legal  or  illegal,  by  means  of  which 
men  are  prevented  from  engaging  freely  in  the 
production  of  any  article. 

Whether  the  unevenness  be  due  to  natural  or  to 
"^  artificial  causes,  the  result  will  be  the  same.  Those 
who  are  engaged  in  producing  the  article  whose 
supply  is  made  abundant  by  the  large  number  of 
producers  will  be  poorly  paid  for  their  work,  while 
those  who  are  producing  the  article  whose  supply 
is  made  scarce  by  the  scarcity  of  producers  will  be 
relatively  well  paid  for  their  work.  That  is  to  say, 
this  unevenness  in  the  distribution  of  workers  among 
different  occupations  will  produce  an  unevenness  in 
their  rewards.  Let  us  suppose  that  in  addition  to 
the  laborers  who  are  gathering  fire-wood  there  is 
another  group  gathering  nuts  for  the  community. 
And  let  us  assume,  in  the  first  place,  that  one  kind 
of  work  is  no  harder  and  requires  no  more  skill  than 
the  oth^r,  and  that  laborers  can  turn  at  will  from 
one  to  the  other.  There  could  be  no  material  dif- 
ference of  earnings  in  the  two  occupations,  because 
if  they  were  larger  in  one  than  in  the  other,  the 
workers  would  go  into  the  one  where  they  could  earn 
most.  That  amount  of  nuts  which  one  laborer  could 
gather  in   a   day   would   sell   for  the   same  as  that 


138  The  Distribution  of  Wealth 

amount  of  wood  which  one  could  gather  in  the  same 
time. 

But  if,  for  any  reason,  the  work  of  gathering  nuts 
were  open  only  to  a  few,  whereas  the  work  of  gather- 
ing fire-wood  could  be  carried  on  by  anybody,  the 
earnings  of  nut  gatherers  would  be  increased  and 
those  of  wood  gatherers  diminished.  There  are  several 
reasons  for  this  result.  In  the  first  place,  the  reduc- 
tion in  the  number  of  nut  gatherers  would  produce, 
other  things  equal,  a  corresponding  increase  in  the 
number  of  wood  gatherers.  That  is  to  say,  with  the 
same  population,  if  fewer  can  engage  in  one  occupa- 
tion, more  must  find  work  in  other  occupations.  In 
the  .second  place,  there  being  fewer  nut  gatherers,  it 
would  not  be  necessary  for  them  to  wander  so  far 
into  the  woods  in  search  of  nuts,  nor  to  search  in 
such  unlikely  places,  nor  to  climb  such  difficult  trees. 
They  could  confine  their  efforts  to  the  more  promis- 
ing fields,  where  nuts  were  more  abundant  and  easier 
to  find.  Under  these  conditions  each  man  could 
gather  more  nuts  than  when  there  were  more  men 
in  the  field.  On  the  other  hand,  there  being  more 
gatherers  of  fire-wood,  they  would  have  to  wander 
farther  into  the  forest,  and  gather  their  wood  in  more 
difficult  places.  Consequently,  each  man  could,  on 
the  average,  gather  less  wood  than  when  there  were 
fewer  in  the  field. 


Wages  139 

This  is  merely  a  case  of  diminishing  returns. 
Though  a  smaller  number  of  nut  gatherers  would  be 
able  to  gather  more  per  man,  they  would  not  be  able 
to  gather  so  many  in  the  aggregate  as  a  larger  number, 
because,  in  order  to  do  so,  they  would  have  to  wander 
just  as  far  into  the  forest,  and  to  search  in  just  as 
unlikely  places.  This  a  smaller  number  could  not  do 
so  well  as  a  larger  number.  On  the  other  hand,  a 
larger  number  of  wood  gatherers  could  gather  more 
wood  than  a  smaller  number,  though  not  so  much 
per  man.  That  is  to  say,  the  product  in  neither  case 
would  remain  constant, /lor  would  it  vary  in  propor- 
tion to  the  number  of  laborers.^ , 

But  the  reduction  in  the  number  of  nut  gatherers 
would  not  only  enable  each  man  to  gather  more,  but 
would,  through  the  reduction  in  the  total  supply  on 
the  market,  make  each  bushel  worth  more.  Similarly, 
the  increase  in  the  number  of  wood  gatherers  would 
not  only  make  it  impossible  for  each  man  to  gather 
so  much,  but  each  cord  would  be  worth  less  because 
of  the  increased  supply  on  the  market.  This  is  an 
additional  reason  why  a  restriction  of  the  number 
of  nut  gatherers  would  increase  their  earnings  and 
diminish  those  of  the  wood  gatherers. 

A  third  reason  is  found  in  the  fact  that,  without 
regard  to  any  change  in  the  amount  of  wood  a  man 

1  See  Chapter  II. 


140  The  Distribution  of  Wealth 

could  gather,  the  mere  increase  in  the  value  of  nuts 
would  reduce  the  value,  or  the  power  in  exchange,  of 
a  given  amount  of  wood.  That  is  to  say,  it  would, 
other  things  equal,  reduce  somewhat  the  number  of 
other  things  —  nuts  being  counted  among  them  —  for 
which  a  given  amount  of  wood  could  be  exchanged.^ 
On  the  other  hand,  the  mere  fact  that  wood  had 
grown  cheaper  would  increase  the  value  of  nuts, 
without  regard  to  any  change  in  the  conditions  of 
their  production  or  their  total  supply  on  the  market. 
That  is  to  say,  the  mere  fact  that  one  other  com- 
modity, such  as  wood,  had  grown  more  abundant 
and  cheaper,  would,  other  things  equal,  increase 
somewhat  the  number  of  other  things  —  wood  being 
among  them  —  for  which  a  given  quantity  of  nuts 
could  be  exchanged.  This  leads  to  the  important 
conclusion  that,  without  regard  to  the  conditions 
within  his  own  occupation,  a  worker  is  benefited  by 
an  increase  in  the  number  in  other  useful  lines  of 
work,  and  injured  by  a  reduction  in  their  number. 
But  this  will  be  more  fully  discussed   later. 

If  the  scarcity  of  nut  gatherers  were  due  to  the 
scarcity  of  the  peculiar  knack  or  skill  required  for 
that  kind  of  work,  the  gatherers  of  fire-wood  could 
not  complain  of  social  injustice  as  the  cause  of  the 
unequal  distribution  of  wealth.     They  would  not  be 

1  See  Chapter  I,  p.  22. 


Wages  141 

so  well  paid  as  the  nut  gatherers,  because  their  work 
would  not  be  worth  so  much.  A  day's  gathering  of 
nuts  would  satisfy  greater  wants  than  a  day's  gather- 
ing of  fire-wood,  and  society  can  not  be  blamed  for 
paying  for  various  services  in  proportion  as  they  are 
wanted.  That  is  the  law  of  value,  whether  applied 
to  services  or  commodities.  If  one  gatherer  of  fire- 
wood could,  in  a  given  time,  gather  more  wood  than 
another,  no  one  would  deny  that  his  services  were 
greater.  He  would  satisfy  more  wants.  But  if  a  nut 
gatherer  can  gather  in  a  day  such  a  quantity  of  nuts 
as  would  satisfy  a  greater  want  than  would  be  satisfied 
by  the  amount  of  wood  which  a  wood  gatherer  could 
gather  in  the  same  time,  on  the  same  reasoning  his 
service  is  greater. 

But  if  the  high  wages  of  nut  gatherers  and  the  low  ^ 
wages  of  wood  carriers  were  due,  not  to  natural 
causes,  but  to  artificial  regulations  or  restrictions 
whereby  men  were  prevented  from  entering  the 
better  paying  occupation,  the  wood  carriers  would 
then  have  a  right  to  complain  of  social  injustice,  not, 
however,  on  the  ground  that  wood  was  too  cheap, 
but  on  the  ground  that  they  were  prevented  from 
gathering  nuts  which  were  worth  more  and  would 
pay  them  better.  They  could  not  demand  that 
society  should  pay  more  for  its  wood,  or  for  the  labor 
of  supplying  the  wood,  but  that  the  restrictions  be 


142  The  Distribution  of  Wealth 

removed  so  that  they  might  go  into  the  occupation 
where  they  could  earn  more.  The  consuming  public 
would  also  have  a  right  to  complain  of  these  restric- 
tions on  the  ground  that  it  was  prevented  from  receiv- 
ing a  more  valuable  service  from  some  of  these  men, 
and  was  compelled,  instead,  to  accept  a  less  valuable 
service.  For  if  a  day's  gathering  of  nuts  would 
satisfy  greater  wants  than  a  day's  gathering  of  fire- 
wood, it  would  be  to  the  advantage  of  the  consuming 
public  to  have  some  of  the  wood  gatherers  stop  that 
work  and  turn  to  gathering  nuts. 

There  are,  as  a  matter  of  fact,  very  few  industries 
where  a  single  laborer  produces  a  finished  article  of 
consumption  without  cooperation  from  others.  Even 
the  mechanic  who  works  independently  must  usually 
buy  his  raw  material  and  his  tools  from  some  one 
else.  His  work  consists  in  taking  a  piece  of  material 
which  is  worth  little  and  putting  it  into  a  shape  in 
which  it  is  worth  more.  The  amount  of  value  which 
he  adds  to  it  is  the  amount  which  he,  together  with 
his  tools,  earns.  Subtract  from  this  amount  the  cost  of 
keeping  himself  supplied  with  tools,  and  you  have  the 
wages  of  his  labor.  Of  the  total  value  of  the  finished 
product,  therefore,  a  part  goes  to  the  mechanic  him- 
self, a  part  to  the  maker,  or  makers,  of  his  tools,  and 
a  part  to  the  producer,  or  producers,  of  his  raw  mate- 
rials.   This  gives  rise  to  two  problems  in  distribution : 


%j^Jr 


%M^ 


ft,  / 


Wages  143 


first,  What  determines  the  total  earnings  of  the  group 
as  a  whole,  including  all  who  have  a  hand  in  the  fin- 
ished article  ?  and  second,  How  are  the  total  earnings 
of  this  group  divided  among  its  various  members  ? 

The  first  problem  differs  in  no  wise  from  that  of 
determining  the  earnings  of  a  single  worker  who, 
without  cooperation,  produces  an  article  ready  for 
use.  As  he  earns  the  value  of  the  finished  article 
which  he  produces,  so  a  group  of  men  who  jointly 
produce  such  an  article  earn  jointly  its  value,  and  the 
earnings  of  the  whole  group,  during  a  given  time, 
depend  partly  upon  the  number  of  articles  which  it 
produces,  and  partly  upon  the  value  of  each  article. 
Moreover,  these  group  earnings  would  be  increased 
and  diminished  in  every  respect  as  the  earnings  of 
the  single  worker.  In  short,  all  that  was  said  of  nuts 
and  fire-wood  and  their  producers  could  be  said  of 
shoes  and  hats  and  their  producers,  or  of  any  other 
specific  product  of  human  industry  and  its  producers, 
including  among  its  producers  all  who  contribute 
anything  toward  its  production  in  the  way  of  labor, 
materials,  machinery,  buildings,  or  land. 

How  the  total  value  of  the  product  is  distributed 
among  the  various  members  of  the  group  which  pro- 
duces it  is  a  more  difficult  problem.  It  may  be 
simplified  somewhat  by  considering  first  the  case  of 
an  article  which  passes  through  several  stages  of  pro- 


144  ^^^  Distribution  of  Wealth 

duction  and  comes  upon  the  market  several  times 
before  its  final  completion.  Such  an  article  is  a  loaf 
of  bread,  the  material  of  which  had  figured  on  the 
market  as  wheat,  and  again  as  flour,  before  reappear- 
ing in  the  form  of  bread.  To  make  the  case  as 
simple  as  possible,  let  us  assume  that  the  wheat  is 
grown  by  an  independent  farmer  who  tills  his  own 
land  with  his  own  tools,  that  it  is  made  into  flour  by 
an  old-fashioned  miller  who  runs  his  own  mill  on  his 
own  site,  while  the  bread  is  made  by  a  baker  who 
does  his  own  work  in  his  own  shop.  Leaving  out 
of  account  the  possible  services  of  tradesmen  and 
transportation  agencies  who  may  have  facilitated  the 
exchange  of  materials,  as  well  as  the  makers  of  the 
tools  used  by  these  three  men,  it  becomes  evident 
that  the  value  of  the  bread  represents  the  total  value 
of  the  work  done  by  all  three,  or  that  the  value  of 
the  bread  is  the  gross  amount  to  be  divided  among 
them.  But  the  share  of  each  is  determined  on  the 
open  market  and  shows  itself  in  the  price  of  wheat,  of 
flour,  or  of  bread,  —  the  price  of  the  wheat  being  the 
share  of  the  farmer,  the  difference  between  the  price 
of  the  flour  and  that  of  the  wheat  being  the  share  of 
the  miller,  and  that  of  the  baker  being  the  difference 
between  the  price  of  the  bread  and  that  of  the  flour.^ 

1  This,  of  course,  ignores  the  other  products  of  the  mill  and  the 
other  ingredients  of  the  bread. 


Wages  145 

An  increase  or  decrease  in  the  demand  for  bread, 
when  due  to  changes  in  the  numbers  or  habits  of 
consumers,  would,  in  the  absence  of  changes  affect- 
ing its  production,  increase  or  decrease  the  demand 
for  the  labor  of  all  three  men,  though  it  would 
doubtless  affect  the  baker  first  and  the  farmer  last. 
But  an  increase  or  decrease  in  the  supply  of  bread, 
in  the  absence  of  changes  in  the  numbers  or  habits 
of  the  consumers,  would  affect  the  different  pro- 
ducers differently  according  to  the  location  of  the 
cause  of  the  change.  If  there  should  be  an  increase 
in  the  number  of  wheat  growers  resulting  in  an 
increase  in  the  supply  of  wheat  which  would  have 
to  be  consumed  as  bread,  let  us  assume,  if  consumed 
at  all,  it  would  reduce  the  price  of  bread  in  order 
that  consumers  might  be  induced  to  consume  more. 
This  would  of  course  give  a  smaller  remuneration  to 
each  farmer.  But  in  order  that  the  increased  supply 
of  wheat  might  be  ground  and  baked,  more  than  the 
ordinary  amount  of  work  would  have  to  be  done  by 
the  millers  and  the  bakers.  This  would  therefore 
increase  the  demand  for  their  labor  and  tend  to 
increase  their  wages,  assuming  that  their  numbers 
remain  unchanged.  They  would  not  lose,  therefore, 
but  gain  by  the  fall  in  the  price  of  bread  when  it 
came  about  in  this  way.  The  farmers,  on  the  other 
hand,  would  lose  more  than  in  proportion  to  the  fall 


146  The  Distribution  of  Wealth 

in  the  price  of  bread,  since  the  margin  between  tne 
price  of  wheat  and  that  of  bread  would  be  increased 
by  the  rise  in  the  remuneration  of  the  millers  and 
bakers. 

But  if  there  should  be  an  increase  in  the  number 
of  bakers,  the  farmers  and  millers  remaining  the 
same,  this  would  tend  to  reduce  the  remuneration  of 
bakers  and  narrow  down  the  margin  between  the 
price  of  flour  and  that  of  bread.  There  being  more 
bakers,  with  no  increase  in  the  demand  for  their 
work,  that  of  each  one  would  be  less  wanted  tl\an  it 
was  before.  It  could  be  spared  with  less  loss,  and 
consequently  less  would  be  paid  to  each  baker  to 
induce  him  to  work.  The  effect  of  this  would  be 
both  to  reduce  the  price  of  bread  and  to  increase 
that  of  flour.  If  the  price  of  flour  should  for  a  time 
remain  the  same,  and  the  whole  of  the  fall  in  the 
remuneration  of  bakers  be  taken  out  of  the  price  of 
bread,  the  cheapening  of  bread  would  tend  to  in- 
crease its  consumption.  But  this  could  not  continue 
without  more  flour,  which  would  not  be  forthcoming 
unless  some  slight  additional  inducement  were  of- 
fered to  the  farmer  and  the  miller  in  the  way  of 
higher  prices.  The  increase  in  the  consumption  of 
bread  would  therefore  tend  to  increase  the  demand 
for  flour  and  wheat,  which  in  turn  would  increase 
the  demand  for  the  labor  of  the  farmers  and  millers. 


Wages  147 

But  if  the  whole  of  the  saving  in  the  cost  of  baking 
should  be  for  a  time  added  to  the  price  of  flour, 
leaving  the  price  of  bread  unchanged,  this  would 
stimulate  the  millers,  and  finally  the  farmers  also,  to 
increased  activity  and  call  forth  a  somewhat  larger 
supply  of  wheat  and  flour.  But  this  could  not  be 
disposed  of  unless  the  price  of  bread  should  fall 
sufficiently  to  induce  a  larger  consumption.  Thus 
the  saving  in  the  cost  of  baking  would  be  divided 
among  the  consumers  of  bread  in  the  form  of  some- 
what lower  prices,  and  the  producers  of  wheat  and 
flour  in  the  form  of  somewhat  higher  prices.  Simi- 
larly, an  increase  in  the  number  of  millers  would 
tend  to  increase  the  demand  for  the  work  of  both 
farmers  and  bakers,  besides  lowering  the  price  of 
bread. 

In  the  chapter  on  Value  ^  we  found  that,  other  ^ 
things  equal,  an  increase  in  the  supply  of  one  com- 
modity constitutes  an  increase  in  the  demand  for  ( 
others  which  are  exchanged  against  it  provided  they 
are  not  substitutes  for  it.  This  is  a  universal  prin- 
ciple, and  applies  to  agents  of  production,  including 
labor,  as  well  as  to  consumable  commodities.  But 
the  principle  applies  with  special  force  in  the  case 
of  several  commodities  or  agents  of  production  which 
have  to  be  combined  for  the  accomplishment  of  the 
1  p.  22. 


148  The  Distribution  of  Wealth 

same  purpose.^  Both  sand  and  lime,  for  example, 
have  to  be  used  in  the  making  of  mortar.  If  no 
sand  were  to  be  had,  nor  any  substitute  for  it,  some 
other  building  material  than  mortar  would  have  to  be 
used,  and  there  would  therefore  be  no  effective  demand 
for  lime  for  that  purpose.  At  least,  no  one  would 
be  in  the  market  buying  it  for  that  purpose.  Even  if 
a  small  amount  of  sand  could  be  had  at  a  high  price, 
it  would  make  mortar  so  expensive  that  comparatively 
little  would  be  used,  and  there  would  therefore  be 
little  demand  for  Hme  for  that  purpose.  But  with  an 
abundant  supply  of  sand  at  a  low  price,  mortar  could 
be  used  freely  as  a  building  material,  and  there 
would  be  a  considerable  demand  for  lime,  tending 
to  raise  its  price. 

The  same  principle  applies  to  different  kinds  of 
labor  which  have  to  be  combined  for  the  accomplish- 
ment of  the  same  general  purpose,  as  is  the  case  with 
that  of  the  farmer,  the  miller,  and  the  baker.  It 
applies  also  to  different  kinds  of  capital,  and  to  cona- 
binations  of  labor,  land,  and  capital  in  the  same 
industry.  An  increase  in  the  supply  of  capital  helps 
the  price  of  labor  in  precisely  the  same  way  that  an 
increase  in  the  supply  of  sand  helps  the  price  of 
lime,  or   as   an   increase   in   the   number  of   bakers 

^  Cf.  Marshall's  theory  of  joint  demand,  "  Principles  of  Economics," 
Book  V,  Ch.  VI. 


Wages  149 

helps  the  price  of  the  labor  of  farmers  and  millers. 
But  the  effect  of  this  principle  is  limited  somewhat 
by  the  fact  that  one  thing  can  sometimes  be  used  as 
a  partial  substitute  for  another.  Where  two  or  more 
factors  are  combined  for  the  production  of  the  same 
result,  it  sometimes  happens  that  the  proportion  in 
which  they  are  combined  can  be  varied,  as  was  found 
in  the  chapter  on  Diminishing  Returns.  When  this  is 
the  case,  if  one  factor  gets  cheaper,  the  tendency  is 
to  use  more  of  it  and  less  of  the  others.  But  there 
is  always  a  limit  to  this  power  of  substitution,  and 
in  many  cases  no  such  substitution  can  be  made. 

But  the  case  of  the  farmer,  the  miller,  and  the 
baker  is  an  abnormally  simple  one  as  it  has  been 
stated,  for  the  reason  that  no  account  has  been  taken 
of  the  fact  that  no  one  works  alone  and  unaided.  It 
has  been  assumed  that  the  farmer,  for  example,  pro- 
duces a  certain  quantity  of  wheat  and  markets  it 
without  any  help  from  any  one  else.  Under  such 
conditions  his  earnings  would  be  easily  distinguish- 
able from  those  of  the  miller  and  the  baker,  who  each 
in  turn,  in  the  same  independent  manner,  buy  their 
raw  materials  and  market  their  products.  But  such 
simple  conditions  are  never  found  in  reality.  The 
farmer  is  always  at  some  expense  for  his  tools,  the 
miller  for  his  machinery,  the  baker  for  his  ovens, 
and  all  alike  for  the  land  upon  which  they  work, 


^: 


150  The  Distribution  of  Wealth 

These  expenses  must  be  deducted  before  we  can 
find  the  net  earnings  of  these  three  men.  That  is 
to  say,  the  makers  of  the  tools,  machinery,  and  ovens 
also  get  a  share  of  the  value  of  the  bread.  The 
owners  of  the  land  will  also  exact  a  share,  and  in 
case  the  producers  own  their  own  land  they  will 
usually  have  been  at  some  expense  in  acquiring  it, 
and  this  expense  must  be  deducted  before  we  have 
the  real  earnings  of  their  labor.  In  other  words, 
the  interest  of  capital  and  the  rent  of  land,  as  well 
as  the  wages  of  labor,  come  out  of  the  total  value  of 
jthe  product.; 

All  that  was  said  regarding  the  process  of  deter- 
mining the  individual  shares  of  the  farmer,  the 
miller,  and  the  baker,  strictly  appUes  only  to  the 
shares  of  the  farming  group,  the  milling  group,  and 
the  baking  group,  each  of  which  combines  a  number 
of  coordinated  factors  usually  classified  as  labor, 
land,  and  capital.  We  have  still  before  us  the  prob- 
lem of  finding  how  the  share  going  to  any  of  these 
groups  is  divided  among  the  factors  of  which  it  is 
made  up.  This  is  a  more  difficult  problem  than  the 
last  because  the  market  does  not  separate  the  prod- 
uct of  each  factor,  as  it  does  that  of  each  group. 
The  specific  problem  of  the  present  chapter  is.  What 
etermines  the  share  which  goes  to  the  laborer  in  the 
form  of  wages  ? 


Wages  151 

In  approaching  this  problem  it  is  necessary  to 
return  to  the  elementary  proposition  which  was 
made  the  starting-point  of  our  explanation  of  value, 
viz.,  that  the  value  of  an  article  depends  upon  how 
much  it  is  wanted  in  comparison  with  other  things. 
This  applies  to  labor  as  well  as  to  commodities. 
The  share  going  to  the  wheat-flour-bread-producing 
group  depends,  as  we  have  seen,  upon  how  much 
bread  is  wanted  in  comparison  with  other  things,  or 
upon  the  value  of  bread ;  but  the  share  of  this  total 
amount  which  goes  to  any  one  of  the  factors  depends 
upon  how  much  that  factor  is  wanted  in  comparison 
with  the  others.  Qi  the  services  of  a  given  amount' 
of  labor  are  wanted  more  than  the  uses  of  a  given 
amount  of  land  or  of  capital,  more  will  be  paid  for/ 
the  labor,  and  it  will  get  a  relatively  large  share  of 
the  value  of  the  joint  product.  But  if  the  services 
of  the  labor  are  less  wanted,  less  will  be  paid  for  itj 
and  it  will  get  a  relatively  smaller  share  of  the  ]omi 
product  than  the  landowner  and  the  capitalist. 

How  much  any  factor  of  production  is  wanted  will 
\  ordinarily  depend  upon  how  much  it  will  add  to  the 
product  of  the  group  with  which  it  is  combined,  or 
to  which  it  is  added.  To  be  sure,  a  handsome  tool 
yields  a  certain  amount  of  direct  satisfaction  to  the 
mechanic,  as  a  handsome  team  does  to  the  farmer, 
and  such  things  will,  on  that  'account,  have  a  some- 


J 


152  The  Distribution  of  Wealth 

what  higher  value  than  less  handsome  ones,  even 
when  the  latter  will  do  as  much  work  and  add  as 
much  to  the  product  of  the  group  to  which  it 
belongs.  But  in  general,  the  desire  for  a  piece  of 
producers'  goods  is  based  upon  its  efficiency  in  pro- 
duction rather  than  upon  its  ability  to  please.  If, 
therefore,  in  the  above  illustration,  the  given  quantity 
of  labor,  when  added  to  an  existing  industrial  unit, 
/  such  as  a  farm,  will  add  more  to  the  total  product  of 
the  farm  than  would  be  added  by  the  addition  of 
the  given  amount  of  land  or  capital,  the  labor  will  be 
inore  wanted  by  the  owner  of  the  farm,  and  he  will 
therefore  pay  it  a  larger  share  of  the  value  of  the 
total  product  of  the  farm.  The  same  rule  can  be 
stated  in  another  way.  If  the  loss  of  the  given 
amount  of  labor  from  the  farm  would  reduce  the 
total  product  more  than  the  loss  of  the  given  amount 
of  land  or  capital,  the  head  of  the  farm  will  want 
it  more,  and  will  therefore  offer  more  to  retain  it. 
Stated  in  either  way,  this  rule  applies  only  to  definite 
units  of  labor,  of  land,  or  of  capital,  since  the  loss 
of  all  the  labor,  of  all  the  land,  or  of  all  the  capital 
would  destroy  the  product  altogether.  But  this 
need  give  us  no  difficulty  if  we  only  remember  that 
these  factors,  in  society  at  large  if  not  on  a  single 
farm,  are  bargained  for  in  units,  and  not  in  the 
ma3St 


Wages  I  S3 

In  order  to  understand  how  the  amount  which  any 
factor  adds  to  the  total  product  of  all  the  factors  is 
determined,  it  is  necessary  to  recall  the  law  of  dimin- 
ishing returns  and  the  principle  of  marginal  produc- 
tivity which  is  based  upon  it.  In  the  chapter  on  that 
subject  we  found  that  the  owner  of  a  farm,  a  factory, 
or  any  other  industrial  unit,  could  best  afford  to 
employ  that  amount  of  labor  which  would  have  a 
marginal  product  equal  to  the  wages  which  he  would 
have  to  pay.^  This  assumes,  correctly  enough  for 
the  purpose  then  in  hand,  that  the  rates  of  wages 
were  fixed  in  the  community  at  large  outside  the 
individual  establishment  in  question,  and  that  larger 
or  smaller  amounts  of  labor  might  be  employed 
according  as  the  owner's  interests  would  dictate. 
That  is,  with  the  productivity  of  the  establishment 
under  varying  applications  of  labor,  and  with  the 
rate  of  wages  known,  the  problem  was  to  find  the 
amount  of  labor  which  he  could  most  profitably 
hire.  But  in  society  at  large  a  different  set  of 
.conditions  prevail.  There  is,  at  any  one  time,  a  cer- 
tain amount  of  land  and  capital  of  certain  varying 
degrees  of  productivity,  and  there  is  also  a  certain 
amount  of  labor  to  be  employed  upon  that  land  and 
capital,  but  the  rate  of  wages  has  to  be  determined. 
1  The  productivity  of   the    land  and   capital  and  the 

iCf.  pp.  78-79,  Chapter  II. 


/ 


^ 


154  The  Distribution  of  Wealth 

amount  of  labor  are  the  fixed  factors  from  which  the 
variable  factor  wages  is  to  be  found.  In, JJiis  -ease 
the  rule  is  that  a  rate  of  wages  will  be  paid  which 
,will  be  approximately  equal  to  the^marginal  product 
of  labor. 

In  order  to  simplify  the  problem,  let  us  assume  for 
the  moment  that  the  conditions  which  prevail  in  the 
community  at  large  prevail  also  with  respect  to  a 
single  farm.  The  first  settler  on  the  farm  is  pre- 
sumably its  owner  and  able  to  control  it  and  its 
product.  If  he  can  when  working  alone  produce  a 
crop  of  500  bushels,  and  if  when  working  with 
another  man  the  two  could  produce  a  crop  of  900 
bushels,  the  amount  added  by  the  second  man  (or 
the  marginal  product  of  labor)  would  be  400  bushels. 
More  than  this  the  owner  could  not  afford  to  pay, 
because  to  do  so  would  le^ve  him  less  than  he  might 
have  by  working  ^lone.  Anything  less  than  this 
he  could  afford  to  pay,  because  to  do  so  would 
leave  him  something  more  than  he  could  have  by 
working  alone.  Assuming  that  the  owner  does  not 
exercise  a  monopoly  power  by  forcing  the  laborer  to 
take  less,  the  wages  of  the  second  man  would  ap- 
proximate this  amount.  Then  if  a  third  man  came 
seeking  employment,  and  if  the  three  together  could 
make  the  farm  yield  1200  bushels,  the  most  that 
the  owner  would  feel  like  paying  him  would  be  300 


Wages  155 

bushels.  That  is  the  amount,  under  the  assumption, 
which  he  adds  to  the  product  of  the  other  two, 
and  it  now  becomes  the  marginal  product  of  labor. 
More  than  that  the  owner  would  not  pay,  because 
to  do  so  would  leave  him  less  than  he  might  have 
without  this  last  man.  But  if  the  third  man  con- 
sents to  work  for  300  bushels,  the  second  man 
will  soon  have  to  come  down  to  the  same  figure, 
for  the  farmer  will  discover  that  he  and  the  third 
man  could  produce  900  bushels,  while  all  three  to- 
gether can  produce  only  1200.  He  would,  there- 
fore, figure  out  that  he  would  be  better  off  without 
the  second  man  unless  he  could  get  him  for  300 
bushels  or  less.  Unless,  therefore,  the  second  man 
will  accept  that  amount,  he  will  have  to  go;  but 
as  conditions  exist  in  the  world  at  large,  he  will 
have  no  place  to  go,  and  he  will  therefore  probably 
accept. 

This  does  not  mean  that  there  are  no  other  lands 
upon  which  the  second  or  third  man  may  work  and 
get  all  the  product,  as  the  owner  of  this  farm  did 
when  he  worked  alone.  But  at  any  one  time  the  best 
lands  will  have  been  appropriated,  so  far  at  least  as  it 
is  known  what  lands  are  the  best,  and  only  inferior 
lands  will  be  open  for  this  kind  of  settlement.  Their 
inferiority  may  be  either  temporary  —  due  to  pres- 
ent  lack   of    transportation   facilities,   to    ignorance 


156  The  Distribution  of  Wealth 

of  the  proper  methods  of  cultivating  these  vacant 
lands,  or  the  lack  of  sufficient  capital  for  their  proper 
utilization  —  or  it  may  be  permanent  —  due  to  the 
natural  sterility  of  the  soil,  to  the  insalubrity  of  the 
climate,  or  to  natural  and  irremovable  difficulties  of 
access.  For  the  time  being,  at  any  rate,  they  are 
less  inviting  than  the  lands  which  have  been  already 
appropriated,  and  the  later  comers  —  the  second  and 
third  men  —  may  find  it  to  their  advantage  to  work 
for  the  first  man,  receiving  wages,  rather  than  to 
appropriate  such  lands  as  are  still  open  to  settle- 
ment. However,  this  will  depend  partly  upon  the 
wages  which  the  first  man  can  find  it  to  his  interest 
to  pay,  and  partly  upon  the  productiveness  of  the 
lands  which  are  still  open.  If  there  is  a  reasonable 
hope  that  they  might  be  able  to  produce  on  the  new 
land  as  much  as,  or  more  than,  they  can  get  in  the 
form  of  wages  by  working  for  the  first  man,  they  will 
probably  choose  to  work  the  land ;  otherwise  they 
will  probably  work  for  wages. 

The  fact  that  there  is,  in  every  country,  some  land 
which  is  so  poor  that  its  use  can  be  had  for  Httle  or 
nothing,  together  with  the  fact  that  there  are  numer- 
ous owners  of  farms  each  of  whom  is  anxious  to 
increase  his  income,  will  operate  to  prevent  the  beat- 
ing down  of  wages  much  if  any  below  the  marginal 
product  of  labor.     Each  farm  owner  would  increase 


Wages  157 

his  income  by  hiring  more  men  if  he  could  get  them 
for  less  than  their  marginal  product.  The  competi- 
tion for  men,  if  wages  should  be  found  to  be  below 
that  point,  would  force  wages  up.  But  if  they  should 
be  found  to  be  above  that  point,  the  unwillingness  of 
the  farmers  to  hire  men  would  bring  wages  down. 
The  normal  tendency,  therefore,  is  for  wages  in 
agriculture  to  proximate  pretty  closely  to  the  mar- 
ginal productivity  of  labor.  Other  things  equal,  the , 
more  labor  there  is  in  propqrtion  to  the  land  and 
capital  the  lower  will  be  its  marginal  productivity, 
and  the  less,  therelore,  will  any  unit  of  labor  be  ] 
w^^d.  This  is  a  necessary  result  of  the  law  of 
diminishing  returns.. 

( All  this  is  equivalent  to  saying  that  each  individual 
laborer  gets  as  wages  approximately  the  equivalent 
of  the  amount  which  he  individually  can  add  to  the 
product  of  the  group  to  which  he  belongs,)  or  of  the 
amount  which  he  can  subtract  from  the  product  of 
the  group  by  withdrawing  himself  from  it.  Find  out 
what  the  group  could  produce  without  his  help,  and  ^ 
then  find  out  what  it  can  produce  with  his  help,  and 
the  difference  between  these  two  amounts  is  the  >^»5 
measure  of  his  worth  to  the  group  —  as  a  man's  worth 
is  calculated  in  the  industrial  world.  But  under  the 
universal  law  of  diminishing  returns,  the  more  there 
are   doing  the  same  kind  of  work  that  he  does  in 


158  The  Distribution  of  Wealth 

comparison  with  the  other  factors  in  the  same  group, 
the  less  difference  will  his  presence  or  absence 
make ;  and  vice  versa,  the  fewer  there  are  doing  his 
kind  of  work  in  comparison  with  all  the  factors  in 
the  group,  the  more  difference  will  his  presence  or 
absence  make  in  the  total  product. 
J,  Ignoring  for  the  present  the  fact  that  there  are 
many  kinds  of  labor  which  cooperate  with  one 
another,  in  the  same  sense  that  land  and  capital  in 
general  cooperate  with  labor  in  general,  the  fore- 
going argument  can  be  made  somewhat  more  definite 
by  the  use  of  the  following  table.  This  purports 
to  give  the  amounts  which  could  be  produced  by 
varying  numbers  of  laborers  on  four  farms  of  differ- 
ent degrees  of  productivity,  each  containing  100 
acres  and  having  the  rggnlf^jfe  capital.  The  num- 
bers are  purposely  made  round  in  order  to  facilitate 
the  calculations  which  are  to  be  based  upon  them. 
On  farm  A,  for  example,  the  change  from  one  to 
two  laborers  makes  a  difference  of  400  bushels  in 
the  product,  which  then  becomes  the  marginal  prod- 
uct of  labor,  while  the  change  from  two  to  three 
laborers  makes  a  difference  of  only  300  bushels,  and 
so  on,  until,  when  the  number  of  laborers  is  increased 
from  four  to  five,  the  fifth  laborer  adds  only  100 
bushels  to  the  total  crop  over  and  above  what  four 
could  produce. 


Wages 


TABLE   E 


159 


Total  Crop  and  Marginal  Product  of  Labor  (Both  in  Bushels) 
FROM  Four  One-hundred-acre  Farms  of  Different  Produc- 
tivity WHEN   CULTIVATED  BY  VARYING  NUMBERS  OF  LABORERS. 


'5  -. 

Fann  A 

Farm  B 

FaimC 

Fann  D 

1 
1 

II 

1 

1 

1 
1 

1  1 

1 

1 

I 

2 

3 
4 
5 

500 

900 

1200 

1400 

1500 

300 

200 

40Q 
700 
900 
1000 

300 

200 
100 

300 
500 
600 

200 
100 

200 

300 

ISP 

Now  suppose  that  there  are,  in  a  given  community, 
a  number  of  farms  of  each  of  the  four  grades  given 
in  this  table.  So  long  as  there  is  only  one  man  for 
each  farm  of  the  A  grade,  the  marginal  product  of 
labor  would  be  500  bushels.  If  any  one  of  them 
should  quit  working  his  farm,  he  would  cut  down  the 
product  of  the  community  by  that  amount.  More- 
over, no  one  could  induce  any  one  else  to  work  for 
him  for  less  than  that  amount,  since  each  would  have 
the  opportunity  of  producing  that  much  for  himself. 
But  if  more  men  should  come,  their  marginal  prod- 
uct would  be  cut  down  to  400  bushels,  because 
some  of  them  would  either  have  to  take  up  land 
of  the  B  grade,  or  work  for  wages  on  some  of  the 


i6o  The  Distribution  of  Wealth 

farms  of  the  A  grade.  In  either  case,  each  one 
would  be  able  to  add  only  400  bushels  to  the  amount 
which  the  community  could  produce  without  him. 
And  if  the  number  of  men  should  still  further  in- 
crease, until  there  were  more  than  two  men  for  every 
A  farm,  and  more  than  one  for  every  B  farm,  the 
marginal  product  would  fall  to  300  bushels,  since 
the  extra  men  would  then  have  to  take  up  land  of  the 
C  grade,  or  else  work  for  wages  on  the  A  or  B  farms. 
In  either  case  each  one  would  be  able  to  add  only 
300  bushels  to  the  total  crop  of  the  community. 
But  inasmuch  as  one  laborer  may  be  as  good  as 
another  whether  he  came  with  the  first  or  the  last 
instalment,  all  laborers  who  were  not  also  owners 
of  some  of  the  better  land  will  have  to  come  down 
to  the  same  wage.  No  matter  whether  he  came 
with  the  first  immigration  when  the  marginal  prod- 
uct was  400  bushels  or  not,  he  will  find  that  under 
the  new  conditions  only  300  bushels  depend  upon 
his  work.  That  is  all  the  community  would  lose  if 
he  were  to  stop,  and  no  device  has  yet  been  found 
which  will  enable  a  laborer  to  secure  more  than  that. 
Following  out  the  argument  according  to  the  table, 
the  number  of  laborers  might  increase  until  their 
marginal  product  fell  to  200,  or  even  100  bushels. 
Strictly  speaking,  even  the  wages  of  the  owners 
themselves   would  fall  as  the  number  of   laborers 


Wages  1 6 1 

increased,  though  this  would  be  more  than  compen- 
sated by  the  increase  in  their  rents,  or  the  shares 
which  they  would  be  enabled  to  secure  by  virtue  of 
their  ownership  and  control  of  the  land.  When  the 
marginal  product  and  the  wages  of  labor  are  300 
bushels,  the  owner  of  one  of  the  A  farms,  for  exam- 
ple, could  stop  working  himself,  and  it  would  only 
make  a  difference  of  300  bushels  in  his  income. 
That  is  all,  therefore,  which  comes  to  him  because 
he  chooses  to  work ;  the  rest  of  his  income  is  wholly 
the  result  of  his  ownership.  At  that  rate  of  wages 
he  can  either  hire  two  or  three  men,  and  in  either 
case  his  income  will  be  300  bushels.  In  the  former 
case  the  total  crop  would  be  900,  and  the  labor  cost 
600  bushels,  and  in  the  latter  case  the  total  product 
would  be  1200  and  the  labor  cost  900  bushels.  Or, 
he  could  hire  two  men  and  also  work  himself  and 
get  an  income  of  600  bushels.  Clearly,  therefore, 
300  bushels  are  due  to  his  labor  and  300  to  his 
ownership.  But  when  there  are  so  many  men  that 
the  marginal  product  is  only  200  bushels,  —  that  is, 
when  there  are  four  men  to  every  such  farm  in  the 
natural  distribution  of  workers,  the  total  wages  are 
only  800  bushels  as  against  a  total  crop  of  1400 
bushels,  leaving  600  bushels  as  rent  which  the  owner 
can  secure  whether  he  works  or  not,  or  in  addition  to 
I  is  wages  if  he  chooses  to  work. 

M 


1 62  The  Distribution  of  Wealth 

The  effect  of  an  increase  in  the  number  of  labor 
ers,  in  proportion  to  the  number  of  farms  upon  both 
wages  and  rent,  can  be  seen  by  a  study  of  the  table 
on  page  163,  which  is  only  an  enlargement  of  the 
last  one. 

To  simplify  the  case  as  much  as  possible,  let  us 
assume  that  these  four  farms  include  all  the  land 
in  a  microscopic  community,  and  that  the  number 
of  men  gradually  increases,  beginning  with  one. 
The  first  man  would  naturally  work  on  farm  A, 
and  there  would  be  no  rent  at  all,  or  at  least  none 
that  could  be  distinguished  from  wages.  With  a 
community  of  three  men,  two  would  naturally  work 
on  farm  A  and  one  on  farm  B,  in  which  case  the 
marginal  product  and  the  wages  would  be  400 
bushels  per  man,  and  farm  A  would  yield  a  rent 
of  100  bushels,  or  one  bushel  per  acre,  while  farm 
B  would  yield  no  rent  at  all.  With  six  men,  three 
would  naturally  work  on  farm  A,  two  on  farm  B, 
and  one  on  farm  C,  in  which  case  the  marginal 
product  would  be  the  same  on  all  three  farms, 
viz.,  ^00  bushels,  and  farm  A  would  yield  a  rent 
of  300  bushels,  farm  B  of  100,  and  farm  C  none 
at  all.  When  there  were  ten  men,  four  would 
naturally  work  on  farm  A,  three  on  farm  B,  two 
on  farm  C,  and  one  on  farm  D,  in  which  case  the 
marginal   product  would   be   only  200  bushels,  and 


Wages 


163 


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164  The  Distribution  of  Wealth 

the  rent  of  farm  A  600,  that  of  B  300,  that  of  C 
100,  and  that  of  D  none  at  all.  Fifteen  men  would 
distribute  themselves  as  follows :  five  on  A,  four 
on  B,  three  on  C,  and  two  on  D ;  wages  would  be 
100,  and  the  rents  would  be  icxx),  600,  300,  and 
100,  respectively.  The  total  wages  are  found  in 
every  case  by  multiplying  the  marginal  product  by 
the  number  of  laborers,  and  the  rent  by  subtracting 
the  total  wages  from  the  total  product.  That  this 
process  is  capable  of  being  reversed  by  finding  the 
marginal  product  of  land,  and  then  finding  the 
total  rent  by  multiplying  the  marginal  product  by 
the  number  of  acres,  and  the  wages  by  subtracting 
the  total  rent  from  the  total  product,  we  shall  see 
when  we  come  to  the  chapter  on  Rent. 

By  changing  the  headings,  these  tables  can  be 
made  to  apply  to  factories  or  any  other  class  of 
industrial  establishments,  as  well  as  to  farms,  for 
the  same  general  law  governs  wages  in  them  all, 
and  in  society  at  large.  This  law  is  that  a  given 
unit  of  labor  of  any  kind  is  valued  in  industry 
according  to  the  amount  which  it  can  add  to  the 
total  product  of  industry,  or  the  amount  which 
can  be  produced  with  this  unit  over  and  above 
what  can  be  produced  without  it.  But  owing  to 
the  law  of  diminishing  returns,  that  amount  dimin- 
ishes  as   the   number   of    the   same   kind   of    units 


Wages  165 

increases  in  proportion  to  all  the  other  factors, 
including  other  kinds  of  labor;  and,  conversely, 
that  amount  increases  as  the  number  of  similar 
units  diminishes  in  proportion  to  all  the  other 
factors.  In  other  words,  the_^^,s  pf  any  par- 
ticular kind  of  labor  are  determined  by  its  mar- 
ginal product,  and  that  marginal  product  diminishes 
as  the  supply  increases  relatively  to  the  other 
factors,  and  increases  as  the  supply  diminishes 
relatively  to  the  other  factors.  The  wages  of  any 
particular  kind  of  labor  depend,  therefore,  quite 
as  much  upon  its  supply  as  upon  its  demand.  We 
have  seen  that  the  demand  is  based  upon  its  mar- 
ginal product,  and  we  have  yet  to  see  upon  what 
its  supply  depends,  for  labor,  like  all  the  other 
factors,  must  be  limited  in  supply  in  order  that  it 
may  command  a  price. 

In  the  first  place,  the  supply  of  labor  is  a  quan- 
tity of  two  dimensions,  and  each  dimension  is 
limited  by  a  somewhat  different  set  of  circum- 
stances. The  total  supply  of  labor  may  be  in- 
creased either  by  increasing  the  number  of  laborers 
or  by  increasing  the  intensity  with  which  each 
labors.  By  intensity  we  mean  the  amount  of  pro- 
ductive energy  expended  by  each  laborer.  The 
time  during  which  he  works  is  one  of  the  factors 
of   the  intensity.     That   is   to    say,  the   intensity  is 


1 66  The  Distribution  of  Wealth 

increased   either  by   working   longer   hours,   or   by 
working  harder  during  the  same  number  of   hours. 

,  The  supply  of  labor  is  reduced  somewhat  by  a 
reduction   of   the   number   of    hours   per   day,   pro- 

,  vided  the  rate  or  speed  is  not  correspondingly  in- 
creased. This  conception  of  intensity  is  somewhat 
at  variance  with  the  quantitative  notions  of  labor 
as  given  us  by  Jevons.^  He  regarded  the  quan- 
tity of  labor  as  the  product  of  time  and  intensity, 
and  intensity  as  consisting  either  in  the  quantity 
of  work  done  or  in  the  painfulness  of  doing  it 
The  painfulness  of  labor  does  undoubtedly  help 
to  Umit  the  amount  of  labor  performed,  but  it  does 
not  seem  expedient  to  regard  the  painfulness  itself 
as  a  part  of  the  quantity  of  labor.  Besides,  the 
painfulness  of  labor  limits  the  time  quite  as  effec- 
tively as  the  rate  of  labor.  On  the  whole,  it  seems 
better  to  treat  both  the  time  and  rate  of  labor 
under  the  head  of  intensity,  since  the  same  cause, 
viz.,  painfulness,  limits  both.  It  is  immaterial  to  the 
laborer  whether  he  works  long  hours  at  a  slow  rate 
or  short  hours  at  a  rapid  rate,  provided  the  pain 
or  sacrifice  is  equal  in  both  cases. 

Any  treatment  of  the  subject  of  wages  which 
ignores  the  question  of  numbers  is  incomplete.  If 
we  conceive  of  a  man  as  living  alone  in  a  Robinson 

1  "Theory  of  Political  Economy,"  London,  1879,  pp.  184-185. 


Wages  167 

Crusoe  state,  the  question  of  numbers  might  very 
well  be  ignored,  and  the  subject  be  treated  simply 
from  the  standpoint  of  a  calculus  of  pleasures  and 
pains.  There  would  then  be  no  question  of  distri- 
bution, and  the  reward  of  labor  would  be  purely  a 
matter  of  production.  We  might  then  stop  when 
we  had  shown  that  the  laborer  would  quit  working 
when  the  painfulness  of  further  labor  would  out- 
weigh the  pleasure  to  be  derived  from  the  further 
earnings.  But,  when  other  laborers  enter  upon  the 
island,  a  new  element  is  introduced.  The  question 
of  the  reward  of  labor  is  still  a  question  of  produc- 
tion, but  of  production  under  changed  conditions, — 
that  is,  it  becomes  a  question  of  marginal  produc- 
tion. Each  laborer  has  more  limited  means  at  his 
disposal,  and  also  has  a  chance  for  cooperation  and 
a  division  of  labor.  The  introduction  of  numbers 
gives  rise  to  a  question  of  distribution,  not  only  as 
between  man  and  man  considered  as  laborers,  but 
also  as  between  man  and  the  other  factors  of  pro- 
duction. 

As  already  suggested,  the  intensity  of  labor  is 
regulated  by  the  pain  or  the  sacrifice  involved  in 
labor.  The  amount  of  work  which  any  laborer  will 
perform  in  a  given  time  is  limited,  not  by  his  abso- 
lute capacity,  but  is  kept  within  those  bounds  by  the 
sense  of  fatigue  and   other   disagreeable   results  of 


1 68  The  Distribution  of  Wealth 

work.  The  total  sacrifice  consists  not  only  in  the 
positive  pain  of  weariness,  but  in  the  confinement 
which  prevents  the  laborer  from  the  fullest  enjoy- 
ment of  his  earnings,  and  in  a  number  of  other 
disagreeable  features.  Still,  the  factors  which  regu- 
late the  intensity  of  labor  are  comparatively  simple. 
But  the  factors  which  regulate  the  other  dimension 
of  the  supply  —  namely,  numbers  —  are  more  com- 
plex and  vary  somewhat  among  different  occupa- 
tions. With  labor  in  general,  the  question  of  the 
limitation  of  this  dimension  of  the  supply  is  mainly 
involved  in  the  question  of  population.  The  share 
of  the  total  product  of  industry  which  goes  to  labor, 
as  compared  with  the  shares  which  go  to  the  other 
factors,  is  therefore  largely  a  question  of  the  relation 
of  population  to  the  natural  resources  plus  the  accu- 
mulated capital;  but  the  share  which  goes  to  one 
class  of  laborers,  as  compared  with  other  classes,  is 
not  always  a  question  of  population  in  general,  but 
is  usually  a  question  of  the  distribution  of  the  popu- 
lation among  different  classes  of  occupations.  We 
have  first  to  consider  the  broader  problem  of  the 
share  of  labor  in  general  as  compared  with  those 
of  land  and  capital,  and  as  furnishing  the  key  to 
that  problem  we  must  consider  the  general  law  of 
population. 

This  law,  first  systematically  worked  out  by  Mai- 


Wages  169 

thus,  and  never  successfully  refuted,  may  be  briefly 
stated  as  follows :  — 

(i)  Every  species  of  plant  and  animal  has  the 
power  to  multiply  faster  than  its  means  of  subsist- 
ence will  permit. 

(2)  The  physiological  power  of  human  increase 
is  also  so  great  that  if  it  should  operate  without 
moral  or  social  restraints  of  any  kind,  it  would  carry 
population  to  such  limits  that  vice  or  misery  or  both 
would  begin  to  thin  out  the  people  and  thus  operate 
as  a  check  upon  further  increase. 

(3*)  Owing  to  the  law  of  diminishing  returns,  a 
larger  number  of  people  can  not,  in  any  given  state 
of  civilization  and  the  industrial  arts,  be  so  well  pro- 
vided for  as  a  smaller  number. 

(4)  There  is  a  strong  natural  instinct  which  in- 
clines the  members  of  our  species  to  the  multiplica- 
tion of  numbers,  and  unless  this  is  counteracted  by 
other  motives,  it  will  lead  to  an  increase  of  population 
beyond  the  limits  where  comfortable  subsistence  is 
possible. 

(5)  This  natural  instinct  is,  however,  opposed  and 
held  in  check  by  several  contrary  motives,  not  the 
least  important  of  which  is  the  desire  for  the  cus- 
tomary goods  to  consume,  coupled  with  the  percep- 
tion on  the  part  of  each  head,  or  would-be  head,  of 
a  family  that  a  larger  number  of  children  means  a 


170  The  Distribution  of  Wealth 

smaller  share  of  the  necessaries,  comforts,  and  luxu- 
ries of  life  for  each  one,  and  this  keeps  the  rate  of 
increase  far  below  that  which  is  physiologically 
possible. 

(6)  How  rigidly  the  increase  of  numbers  is  held 
in  check  by  this  motive  depends  upon  the  ideas  of 
the  people  as  to  what  is  essential,  in  the  way  of 
incomes,  to  their  happiness^  —  in  other  words,  upon 
their  standard  of  living.  It  is  the  standard  of  living, 
therefore,  which  determines  the  rate  of  increase  of 
jpqpulatjon,  when  we  have  given  the  amount  of  wealth 
and  the  possibilities  of  production.  It  plays  the  same 
part  in  determining  the  supply  of  labor  which  the_ 
cost  of  producing  commodities  plays  in  determining 
their  supply. 

The  standard  of  living  means,  technically,  the 
number  of  other  wants  whose  satisfaction  the  indi- 
vidual considers  of  more  importance  than  that .  of__ 
the  procreative  instinct.  The  individual  who  places 
very  few  wants  before  that  instinct  has  a  very  low 
standard  of  living,  and  he  who  places  many  wants 
before  that  one  has  a  high  standard.  Whenever 
the  individual  with  a  low  standard  is  reasonably 
certain  of  having  enough  to  satisfy  the  few  wants 
which  he  considers  more  important  than  the  pro- 
creative  instinct,  he  will  usually  undertake  the  rear- 
ing of  a  family.      Where  the  average   standard   of 


Wages  171 

living  is  low  throughout  a  whole  community,  or 
any  considerable  class  of  the  community,  popula- 
tion will  increase  so  rapidly  that,  under  the  law  of 
diminishing  returns,  that  part  of  the  population 
which  has  to  work  for  wages  will  be  reduced  to 
the  point  where  it  can  only  maintain  its  low  stand- 
ard of  living.  But  where  the  average  standard  of 
living  is  high,  numbers  will  not  increase  beyond 
the  point  which  will  enable  the  laboring  popula- 
tion to  live  up  to  its  standard,  unless  the  immigra- 
tion of  laborers  of  a  lower  standard  from  some 
other  community  should  set  in,  in  which  case  the 
laborers  of  a  lower  standard  will  displace  those  of 
a  higher  standard,  causing  the  latter  to  migrate  or 
stop  multiplying,  leaving  the  field  ultimately  in  the 
possession  of  the  low  standard,  as  surely  as  cheap  7l  i 
money  will  drive  out  dear  money,  or  as  sheep  ^^ 
will  drive  cattle  off  the  western  ranges.  Thus 
under  the  system  of  private  property  and  the 
present  constitution  of  the  family,  both  of  which 
combine  to  place  the  responsibility  for  the  support 
of  the  family  upon  those  who  are  responsible  for 
its  existence,  the^tandard  of  living  determines  the 
abundance  or  the  scarcity  of  labor,  and  indirectly, 
the^  rate  of  wages. 

Consistently  with   the   cost  of   production   theory 
of  value  which  he  held  in  common  with  the   other 


172  The  Distribution  of  Wealth 

classical  economists,  Ricardo  endeavored  at  some 
length  to  show  that  the  natural  price  of  labor  is 
fixed  by  the  cost  of  producing  laborers.     "  The  nat- 

'  ural  price  of  labor  is  that  price  which  is  necessary 
to  enable  the  laborers,  one  with  another,  to  subsist, 
and  to  perpetuate  their  race  without  either  increase 
or  diminution."  In  his  subsequent  argument  he 
considerably  modified  this  rigid  form  of  statement 
by   showing  that   this   price  depends   largely  upon 

Invhat  the  laborers  themselves  consider  necessary. 
Yet  in  the  end  he  left  no  doubt  that  he  believed 
that  the  tendency  was  in  the  long  run  to  force  the 
standard  of  living  down  to  a  subsistence  minimum. 
Though  Ricardo 's  form  of  statement  is  the  more 
rigid,  yet  practically  the  same  opinion  had  been 
common  to  his  predecessors,  including  Adam  Smith. 
To  Malthus,  contrary  to  the  popular  impression, 
belongs  the  credit  of  having  first  made  a  thorough 
application  of  the  standard  of  living  to  the  wages 
question.  He,  perhaps,  more  than  any  one  else, 
insisted  upon  the  possibility  and  the  importance  of 
raising  the  standard  of  living  of  the  laboring  classes 
by  education  and  more  liberal  surroundings,  so  that 
an  effective  prudential  check  on  population  would 
be  introduced.  In  common  with  the  other  early 
economists  he  concurred  fully  in  the  cost  of  pro- 
duction theory  of   wages;   yet  he  explained   more 


Wages  173 

fully  than  any  one  else  in  what  the  cost  of  produc- 
tion of  labor  consisted  —  that  it  meant,  in  fact, 
simply  the  standard  of  living  of  the  laborers. 

So  long  as  we  limit  the  discussion  to  the  general 
class  of  unskilled  laborers,  the  correspondence  is 
tolerably  complete  between  the  cost  of  production  of 
other  commodities  and  the  standard  of  living  of  la- 
borers. The  one  operates  in  essentially  the  same 
manner  upon  price  as  the  other  does  upon  wages. 

(i)  A  rise  in  the  standard  of  living  of  laborers 
tends  to  reduce  the  amount  of  labor  that  will  be 
supplied  at  any  given  rate  of  wages  by  diminishing 
the  birth-rate,  just  as  a  rise  in  the  cost  of  production 
of  another  commodity  will  reduce  the  amount  of  that 
commodity  that  will  be  supplied  at  any  given  price^ 

(2)  With  a  given  standard  of  living,  a  rise  in  the 
rate  of  wages  will  result  in  a  higher  birth-rate  and  a 
larger  supply  of  labor,  just  as,  with  a  given  cost  of 
production,  a  rise  in  the  price  of  another  commodity 
will  result  in  a  larger  production  of  that  commodity,^ 

(3)  The  laborer  does  not  consciously  estimate  what 
it  has  cost  to  produce  him,  and  then  set  the  price  of 
his  labor  accordingly.  Neither  does  the  farmer  thus 
set  the  price  of  his  wheat.  In  either  case,  produc- 
tion precedes  sale;  and  the  seller  gets  all  he  can, 
regardless  of  the  cost  of  production.  But  in  either 
case,  if  the  sellers  are  unable  to  get  enough  to  induce 


174  The  Distribution  of  Wealth 

a  continuance  of  the  same  rate  of  production,  the 
supply  will  eventually  be  diminished  until  the  price 
does  become  a  sufficient  inducement  to  continue 
production.  Though  the  nature  of  the  motives  that 
operate  in  the  two  cases  are  quite  different,  the  effect 
on  price  is  quite  similar. 

(4)  It  must  be  conceded  that  the  standard  of  Uving 
is  not  the  only  factor  that  limits  the  number  of  labor- 
ers. On  the  outside  is  the  limit  set  by  the  physi- 
cal capacity  for  human  increase.  But  one  of  the 
important  differences  between  economic  man  and 
the  uneconomic  animals  is  that  with  man  reproduc- 
tion does  not  begin  so  early  nor  continue  so  rapidly 
as  is  physically  possible.  But  numerous  other  causes 
than  economic  considerations  doubtless  check  popula- 
tion within  the  outside  limits  set  by  nature.  For  a 
variety  of  reasons  society  has  placed  its  condemna- 
tion upon  extremely  early  marriages.  There  are 
other  legal  and  social  restraints  that  also  operate  in 
the  same  way.  With  equal  justice  may  it  be  said 
that  cost  of  production  is  not  the  only  factor  that 
limits  the  supply  of  any  commodity.  With  every 
commodity  there  are  certain  outside  Umits  set  by 
nature,  and  in  many  cases  there  are  legal  and  social 
restraints.  But  within  these  bounds  cost  of  produc- 
tion does  operate.  In  fact,  it  operates  to  such  an 
extent  that  the  supply  never  reaches  these  outside 


Wages  175 

limits,  so  that  all  other  factors  become  practically 
inoperative.  Similarly,  with  population.  Economic 
considerations,  —  the  fear  of  lack  of  means  of  sub- 
sistence, according  to  prevailing  standards,  —  oper- 
ate to  limit  population  within  the  bounds  set  by 
other  factors,  so  that  they  become  practically  inopera- 
tive ;  and  the  standard  of  living  becomes  the  efficient 
cause  for  the  limitation  of  numbers.  After  allowance 
is  made  for  all  other  possible  checks,  the  fact  remains 
that  the  standard  of  living  operates  as  a  still  further 
check.  It  adds  considerably  to  the  height  of  the 
dam  that  keeps  back  the  flood  of  possible  human 
increase.  The  plain  question  of  bread  and  butter 
enters  into  a  man's  calculations  even  on  the  subject 
of  matrimony.  If  the  man's  standard  of  living  in- 
cludes not  only  butter  on  his  bread,  but  jam  on  his 
butter,  it  is  then  a  question  of  bread  and  butter  and 
jam  that  enters  into  his  calculations.  In  other  words, 
if  the  question  of  means  of  living  enters  into  his 
calculations  at  all,  it  must  be  a  question  of  living 
according  to  some  standard;  and  it  makes  a  vast 
difference  whether  that  standard  be  high  or  low. 

The  present  tendency  of  economic  science  is 
toward  a  study  of  man  as  the  economizer,  the  satisfier 
of  wants,  the  chooser  between  pleasures  and  pains. 
Therefore,  we  may,  with  perfect  propriety,  treat 
man's  domestic  in  common  with  his  other  wants,  and 


176  The  Distribution  of  Wealth 

study  his  satisfaction  of  these  wants  as  a  part  of  his 
economic  activity.  In  accordance  with  the  principle 
of  the  declension  of  utility  and  the  satiation  of  wants, 
a  man  will  procure  first  the  thing  that  satisfies  the 
most  pressing  want.  But  after  a  time  that  want 
becomes  so  far  satiated  as  to  be  less  pressing  than 
another.  Then  the  man's  attention  will  be  turned  to 
the  satisfaction  of  the  next,  and  so  on.  A  man  will 
probably  be  sure  of  a  certain  amount  of  bread  before 
he  tries  to  procure  butter.  But,  when  his  economic 
condition  assures  him  of  a  partial  satisfaction  of  his 
desire  for  bread,  his  desire  for  butter  becomes 
stronger  than  his  desire  for  an  additional  piece  of 
bread.  Then  he  will  procure  butter  also.  In  the 
same  manner,  after  his  desire  for  bread  and  butter  is 
assured  of  a  certain  degree  of  satisfaction,  another 
desire — for  example,  that  for  jam  —  becomes  effect- 
ive in  giving  direction  to  his  activity ;  and  thus,  as  his 
economic  condition  continues  to  improve,  a  larger 
number  of  desires  rise  above  his  horizon,  and  become 
effective  in  directing  his  economic  activity.  Some- 
where in  the  scale  of  desires  his  domestic  affections 
have  a  place,  and  become  effective  in  their  proper 
order.  The  position  of  this  particular  class  of  wants 
in  the  scale  makes  what  is  called  the  standard  of 
living.  Thus  it  will  appear  that  a  high  standard  of 
living  when  referred  to  the  question  of   population 


Wages  177 

may  mean  one  of  two  things.  It  may  mean  that  the 
general  scope  of  the  people's  wants  has  been  widened 
and  deepened,  or  that  the  domestic  affections  ^  have 
been  weakened,  or  both.  On  the  whole,  we  have 
every  reason  for  beHeving  that  the  standard  of  living 
acts  as  an  effective  check  on  the  increase  of  numbers 
and  the  supply  of  laborers  in  general. 

While  it  is  undoubtedly  true  that  wages  must  in 
the  long  run  be  high  enough  to  repay  the  cost  of 
producing  laborers,  yet  it  does  not  follow  that  the 
standard  of  living  of  the  laborer  directly  fixes  the  rate 
of  wages.  The  fact  that  a  man  has  high  standard 
of  living  will  no  more  enable  him  to  get  high  wages 
than  the  fact  that  an  individual  bushel  of  wheat  cost 
the  producer  a  great  deal  will  enable  him  to  sell  it  at 
a  high  price.  The  standard  of  living  of  laborers  and 
the  cost  of  producing  wheat  only  affect  wages  and 
the  price  of  wheat  by  limiting  the  quantity  supplied. 

An  obstacle  to  the  perfect  working  of  this  law  as 
applied  to   labor  is  the  length  of  time  necessary  to 

iPor  want  of  a  better  term  we  are  compelled  to  use  the  term 
"  domestic  affections  "  in  a  somewhat  general  sense,  including  the  sum 
total  of  those  motives  which  impel  toward  marriage  and  the  begetting 
of  offspring.  If  we  distinguish  between  the  animal  passions  and  the 
higher  domestic  affections,  we  shall  find  that  the  latter  quite  often 
check  rather  than  increase  population  by  making  parents  more  con- 
siderate of  the  future  of  their  children,  and  unwilling  to  risk  their  best 
interests  by  having  too  many  to  provide  for. 
N 


1 78  The  Distribution  of  Wealth 

greatly  increase  or  diminish  the  total  supply  of 
labor.  Population  changes  very  slowly,  though  the 
fund  of  unemployed  labor  may  act  more  quickly  on 
the  supply.  But  it  will  be  difficult  to  find  two  com- 
modities whose  supplies  can  be  increased  or  dimin- 
ished with  precisely  the  same  degree  of  expedition. 
Labor  is  simply  an  extreme  case  among  those  com- 
modities whose  demand  and  supply  are  very  slowly 
adjusted  to  one  another.  Yet  there  is  the  same 
tendency  for  such  an  adjustment  to  take  place  as  has 
long  been  observed  in  regard  to  other  commodities. 
But,  in  the  case  of  wages,  another  fact  affects  the 
adjustment.  A  change  in  the  rate  of  wages  so 
slowly  affects  the  population  that  the  standard  of 
living  of  the  laborers  may  itself  change  before  the 
change  in  the  supply  brings  wages  back  to  the  former 
level.  The  harshness  of  the  **  iron  law  of  wages  " 
is  materially  softened  by  the  fact  that  in  a  free 
society,  and  especially  in  a  country  of  universal 
education,  the  standard  of  living  is  more  easily  raised 
than  lowered.  The  tendency  of  freedom  is  to  encour- 
age aspirations  and  ambitions,  while  the  inevitable 
result  of  education  is  to  broaden  the  mental  horizon 
and  develop  new  desires.  The  inherent  optimism  of 
Malthusianism,  when  properly  understood,  appears 
in  this  connection.  To  this  end  Malthus  became  an 
apostle  of  free  institutions  and  political  equality,  as 


Wages  179 

being  conducive  to  the  development  of  self-respect, 
dignity,  and  thrift  on  the  part  of  the  laboring  classes. 
He  attributed  habits  of  improvidence  and  other 
proletarian  vices  to  "  despotism,  oppression,  and 
ignorance."  It  is  something  more  than  mere  pre- 
diction to  suggest  that  along  the  lines  of  liberal  sur- 
roundings,  education,  and  culture  lies  the  ultimate 
solution  of  the  labor  problem. 

Though  the  rule  that  a  laborer  generally  gets  the^ 
equivalent  of  the  marginal  product  of  his  kind  of 
labor  is  of  universal  application,  we  have  found  that, 
so  far  as  the  general  class  of  unskilled/  laborers  are 
concerned,  that  marginal  product  is  in  part  deter- 
mined by  the  number  of  such  laborers,  which  is  in 
turn  very  largely  determined  by  their  standard  of 
jiving.  We  have  yet  to  consider  what  additional 
factors  limit  the  numbers  in  those  trades  and  callings 
where  marginal  productivity  and  wages  are  high. 
Since  it  is  sometimes  possible  to  change  from  one 
occupation  to  another,  there  must  be  something  be- 
sides the  standard  of  living  to  limit  the  numbers  in 
the  more  remunerative  callings. 

Perhaps  the  most  unfortunate  result  of  too  rigid 
an  adherence  to  the  "  cost  of  production "  theory 
of  wages  appears  in  discussions  of  the  causes 
of  differences  of  wages  in  different  occupations. 
Adam  Smith  lays  down  the  proposition   that   "the 


i8o  The  Distribution  of  Wealth 

whole  of  the  advantages  and  disadvantages  of  the 
different  employments  of  labor  and  stock  must,  in 
the  same  neighborhood,  be  either  perfectly  equal 
or  continually  tending  to .  equality.  If  in  the  same 
neighborhood  there  was  any  employment  either 
more  or  less  advantageous  than  the  rest,  so  many 
people  would  crowd  into  it  in  the  one  case,  and  so 
many  would  desert  it  in  the  other,  that  its  advantages 
would  soon  return  to  the  level  of  other  employ- 
ments." ^  In  his  enumeration  of  the  principal  cir- 
cumstances which  "  make  up  for  a  small  pecuniary 
gain  in  some  employments,  and  counterbalance  a 
great  one  in  others,"  he  names  **  the  small  or  great 
trust  which  must  be  reposed  in  those  who  exercise 
them."  This  contains  the  rather  startling  implication 
that  it  is  a  disadvantage  to  have  confidence  placed  in 
one's  self.  This  is  manifestly  carrying  the  cost  of 
production  theory  a  little  too  far.  Moreover,  in  the 
other  circumstances  which  he  names,  he  assumes 
that  the  difference  in  the  wages  between  skilled  and 
unskilled  occupations  is  entirely  due  to  the  difference 
in  the  expense  of  learning  them.  But  the  difference 
in  wages  will  in  many  cases  prove  out  of  all  propor- 
tion to  the  difference  in  the  expense.  It  would  be 
just  as  easy  to  account  for  differences  in  the  rent  of 
real  estate  on  the  basis  of  the  difference  in  the  cost 

1  "Wealth  of  Nations"  (Rogers  ed.),  Vol.  I,  p.  103  et  seq. 


Wages  1 8 1 

of  the  improvements.  In  the  case  of  labor,  account 
must  be  taken  of  differences  in  native  and  hereditary 
qualities,  just  as  we  must  take  account  of  difference 
in  situation  and  "  original  and  indestructible  powers 
of  the  soil "  in  the  rent  of  land. 

_The_margiiial^productivity  of  labor  of  any  classl 
determines  the  rate  of  wages  of  that  class.  But,' 
with  different  kinds  and  qualities  of  labor,  there  are 
different  causes  for  the  limitation  of  the  supply. 
Hitherto  we  have  simply  discussed  the  causes  which 
limit  the  general  class  of  unskilled  labor.  When  we 
consider  the  supply  of  skilled  or  professional  labor, 
we  shall  find  some  new  factors  entering  in.  There 
are  certain  forms  of  ability  so  unique  and  excep- 
tional that  it  is  practically  impossible  either  to  in- 
crease or  diminish  the  supply.  Nature  seems  to 
have  set  the  limits,  and  the  possessors  of  such  quali- 
ties enjoy  a  monopoly  as  absolute  as  the  possessor  of 
meteoric  iron  or  a  Sistine  Madonna.  There  are  other 
orders  of  ability  that  are  capable  of  cultivation  to  a 
more  or  less  limited  extent.  It  is  perhaps  possible 
for  the  average  man  to  acquire  proficiency  in  any  of 
the  majority  of  skilled  occupations,  if  he  trains  long 
enough  and  carefully  enough.  But  different  men 
can  acquire  proficiency  in  a  given  skilled  occupation 
with  different  degrees  of  expense,  owing  to  differ- 
ences in  natural  talents.     The  tendency  will  be  for 


l82 


The  Distribution  of  Wealth 


as  many  men  to  go  into  that  occupation  as  can  do  so 
with  advantage  to  themselves.  But,  when  those  best 
fitted  for  it  have  gone  into  it,  it  begins  to  cost  the 
additional  men  more  and  more  in  the  way  of  prepa- 
ration. Finally,  the  man  will  be  reached  who  is  so 
ill  adapted  for  that  line  of  work  that  it  will  cost  him 
in  preparation  all  that  he  will  ever  gain  from  it. 
Here  the  supply  of  that  kind  of  labor  will  cease; 
and  its  rate  of  wages  will  be  measured  by  the  pro- 
ductivity y  as  well  as  by  the  expense^  of  the  marginal 
increment.  Those  who  are  able  to  acquire  profi- 
ciency in  that  line  of  work  at  a  less  cost  than  that 
which  the  marginal  man  must  undergo,  enjoy  a  sur- 
plus analogous  to  rent  for  their  personal  qualities.^ 

The   nature   of   what   is   usually  termed   superior 
ability  or  talent  needs  examination.     It  may  mean 

^This    may  be    illustrated   by  the   following    diagram.     Let   the 
number  of  laborers  be  measured  along  the  line  OX^  and  the  produc- 


tivity  along  the  line  OY.  The  line  EA  will  then  represent  the 
declining  productivity,  and  GA  the  increasing  cost,  of  successive 
laborers,  in  which  case  the  supply  will  be  measured  by  OF^  the  rate 
of  wages  by  OD^  and  the  sum  of  personal  rents  by  GDA. 


Wages  1 83 

the  capacity  for  exerting  an  absolutely  greater 
amount  of  productive  energy,  or  it  may  mean  simply 
the  possession  of  a  kind  of  ability  that  is  scarce,  and 
because  of  its  scarcity  commands  a  high  price  in  the 
market.  The  difference  is  of  some  importance. 
Where  two  men  are  engaged  in  entirely  dissimilar 
occupations,  it  is  practically  impossible  to  determine 
which  exerts  the  greater  amount  of  productive 
energy  or  whose  absolute  productivity  is  greater. 
If  we  compare  two  bricklayers,  and  find  that  one 
can  lay  on  the  average  three  thousand,  and  the 
other  only  two  thousand,  bricks  in  a  day,  it  is  quite 
safe  to  say  that  the  absolute  productivity  of  the 
former  is  the  greater.  But,  if  we  compare  a  brick- 
layer with  a  bank  cashier,  we  have  not  the  data  for 
a  similar  comparison.  It  is  impossible  to  say  with 
certainty  that  the  work  of  the  cashier  is  absolutely 
more  productive  than  that  of  the  bricklayer.  The 
probabilities  are  that  it  is  not.  If  the  cashier  gets 
better  wages  than  the  bricklayer,  it  is  not  due  to 
any  absolutely  superior  ability,  but  because  the  kind 
of  ability  possessed  by  the  one  is  less  abundant  than 
that  possessed  by  the  other.  If  the  jeweller  gets 
better  wages  than  the  baker,  it  is  probably  for  the 
same  reason  that  an  ounce  of  silver  sells  higher  than 
an  ounce  of  bread.  This  is  not  because  the  absolute 
utility  of   silver   is    greater,  but   because,  owing   to 


184  The  Distribution  of  Wealth 

differences    in   the  scarcity,  its   marginal    utility  is 
greater. 

To  sum  up,  we  conclude  that  the  marginal  pro- 
ductivity of  labor  is  the  factor  that  is  present  in 
all  cases  in  the  determination  of  wages,  that  the 
standard  of  living  and  the  painfulness  of  labor  are 
the  efficient  causes  for  the  limitation  of  the  supply 
of  labor  in  general,  that  the  marginal  cost  of  acquir- 
ing proficiency  in  the  skilled  occupations  is  the 
efficient  cause  for  the  limitation  of  the  supply  of 
specially  skilled  labor,  and  that  there  is  an  element 
of  "rent"  of  personal  ability  as  well  as  of  land. 

COLLATERAL  READING 

T.  R.  Malthus,  Principles  of  Political  Economy,  Chapter  IV. 
Alfred  Marshall,  Principles  of  Economics,  Book  VI,  Chap- 
ters III-V. 
F.  W.  Taussig,  Wages  and  Capital,  Chapters  IV-V. 
J.  B.  Clark,  The  Distribution  of  Wealth,  Chapters  XI-XIV. 


CHAPTER  V 

RENT 

Labor  and  land  are_the_original  or  primary  factors 
of  producrinn^  capital  being  a  secondary  factor  pro- 
ducedjby -the_pther  two^nd  in^  turn  aiding  them  in 
the  work  of  further  production.  One  peculiar  thing 
about  land  is  its  quality  of  extension  which  it  pos- 
sesses in  greater  degree  than  other  forms  of  wealth. 
Under  our  present  laws  of  property  this  gives  its 
owners  control  over  certain  productive  forces  and 
desirable  objects  which  nature  alone  can  supply  and 
which  she  has  chosen  to  scatter  over  such  wide 
spaces  that  they  can  only  be  utilized  in  connection 
with  considerable  areas  of  the  earth's  surface.  They 
include  such  things  as  sunlight  and  heat,  rainfall, 
and  even  the  atmosphere  itself,  to  say  nothing  of 
mineral  deposits,  soil,  and  scenery.  These  things  all 
exist  in  considerable  abundance — some  of  them  in 
such  abundance  that  they  could  have  no  value  when 
dissociated  from  the  land ;  but  ground  space  is 
necessary  in  order  to  utilize  them,  and  ground  space 
is  limited  —  so  limited  as  compared  with  the  demand 

185 


]^ 


1 86  The  Distribution  of  Wealth 

for  it  in  certain  parts  of  the  world  that  vast  sums 
are  paid  for  it.  These  productive  forces  are  in 
reaUty  parts  of  the  land,  being  mere  appurtenances 
of  those  areas  over  which  nature  has  seen  fit  to 
scatter  them. 

However,  nature  has  not  distributed  them  with 
absolute  impartiality  over  the  entire  surface  of  the 
earth,  some  parts  being  favored  above  others.  In 
every  settled  community,  location  also  becomes  a 
factor  of  great  importance  in  determining  the  superi- 
ority or  inferiority  of  different  areas  of  land.  The 
question  of  the  quality  of  the  land  depends,  there- 
fore, upon  a  number  of  factors,  all  of  which  affect 
in  some  way  the  value  of  the  product  which  it  will 
yield  in  proportion  to  the  cost  of  cultivating  or 
utilizing  it.  The  product  may  be  agricultural,  min- 
eral, or  manufactured  goods.  Proximity  to  market \ 
and  cheapness  of  transportation  are  therefore  as 
important  as_^i][  or  climate  in  determining  the^/ 
c[uality  of  the  land. 

It  would  be  easy  to  picture  a  community,  and 
perhaps  not  so  very  difficult  to  find  one,  in  which 
land  is  so  abundant  as  not  to  count  as  a  factor  of 
production  at  all,  being  classed  as  free  goods  along 
with  air  in  most  places  and  water  in  mid-ocean.  But 
very  soon  in  the  development  of  such  a  community 
two  things  will  happen  :  first,  the  most  favored  spots 


Rent  187 

will  be  appropriated,  so  far  as  it  is  known  what  are 
the  most  favored  ones,  leaving  the  increasing  popu- 
lation access  only  to  the  less  favored  ones ;  second, 
in  order  to  provide  for  the  growing  wants  of  the 
people,  those  most  favored  spots  will  be  cultivated 
beyond  the  point  where  the  law  of  diminishing 
returns  begins  to  operate.  Until  this  time  arrives, 
land  would  not  count  as  an  economic  factor  at  all, 
and  there  would  be  no  occasion  to  economize  in  its 
use.  None  of  it  would  command  a  price  so  long  as 
there  was  other  land  just  as  good  not  yet  appro- 
priated and  to  be  had  for  nothing. 

Excepting  such  land  as  is  used  for  parks,  pleasure 
grounds,  dwelling  sites,  and  other  similar  purposes, 
any  particular  acre  of  land,  like  any  other  factor  of 
production,  is  wanted  only  for  what  it  will  add  to 
one's  income,  —  that  is,  for  what  it  will  yield  over  and 
above  the  cost  of  using  it.  But  the  cost  of  using  it 
resolves  itself  into  the  amount  which  the  labor  and 
capital  used  in  its  cultivation  could  produce  else- 
where. If  there  are  few  other  opportunities  for 
employing  labor  and  capital,  and  their  possible  earn- 
ings consequently  small,  little  will  be  sacrificed  in 
withdrawing  them  from  other  lines  of  work  in  order 
to  employ  them  on  the  land  in  question.  Whatever 
they  can  produce  on  this  land  over  and  above  that 
amount  is  therefore  an  additional   income   to   their 


1 88  The  Distribution  of  Wealth 

owner,  and  is  due  to  his  use  of  the  land.  But  if 
there  are  many  and  excellent .  opportunities  for  the 
employment  of  one's  labor  and  capital,  and  their 
earnings  consequently  large,  much  will  be  sacrificed 
in  withdrawing  them  from  those  other  possible  open- 
ings, and  only  the  surplus  above  this  large  amount 
which  they  can  produce  on  a  given  piece  of  land 
could  count  as  the  earnings  of  the  land,  or  as  the 
addition  to  one's  income  which  comes  to  one  through 
the  use  of  the  land.  As  already  pointed  out,  the 
land  is  wanted  only  because  of  this  surplus. 

If  a  certain  individual,  with  a  given  amount  of 
labor  and  capital  at  his  disposal,  can  earn  l^iooo 
a  year  by  working  for  other  people,  it  will  be 
for  the  reason  that  he  and  his  capital  can  add  that 
much  to  the  product  of  some  industrial  estabUsh- 
ment  over  and  above  what  it  could  produce  without 
them.  A  piece  of  land  upon  which  he  with  his 
capital  could  produce  a  total  crop  worth  only 
^looo  would  be  worth  nothing  to  him,  but  one 
upon  which  he  could  produce  a  crop  worth  ;^I200 
would  be  worth  approximately  $200  a  year.  If, 
however,  conditions  should  change  so  that  he  with 
his  capital  could  only  earn  ^800  a  year  elsewhere, 
then  the  land  upon  which  he  could  produce  a 
crop  worth  $1000  would  be  worth  approximately 
;^200   a    year   to   him,    while   land    upon   which    he 


Rent  189 

could  produce  $1200  would  be  worth  $400  a  year. 
These  are  the  amounts  which  he  would  logically 
have  to  attribute  to  his  use  of  the  land  in  question, 
the  rest  of  his  gross  income  being  attributable  to 
his  labor  and  capital. 

Until  the  time  arrives  when  the  best  grade  of 
land  is  all  appropriated  and  cultivated  beyond  the 
point  of  diminishing  returns,  no  particular  acre  or 
parcel  of  land  could  add  anything  to  one's  income 
over  and  above  what  one  could  secure  without  it. 
Nor  could  it  add  anything  to  the  total  product  of 
the  community.  So  long  as  there  is  other  land  of 
the  same  grade  still  appropriable,  as  much  could  be 
produced  without  any  particular  acre  as  with  it ;  and 
so  long  as  the  best  grade  of  land  is  not  cultivated 
up  to  that  degree  of  intensity  where  it  begins  to  yield 
diminishing  returns,  it  would  subtract  nothing  from 
the  total  product  of  the  community  to  have  some  of 
the  land  thrown  out  of  cultivation,  and  all  the  labor 
and  capital  employed  on  the  remaining  land.  If  any 
of  it  were  withdrawn  from  cultivation,  the  labor  and 
capital  which  had  cultivated  it  could  either  be  em- 
ployed on  some  other  land  already  under  cultivation, 
adding  to  the  product  of  this  land  as  much  as  or 
more  than  it  had  been  producing  on  the  land  from 
which  it  was  removed,  or  it  could  move  over  on  to 
another  unappropriated  and  equally  good  piece  of 


190  The  Distribution  of  Wealth 

land  where  it  could  produce  just  as  much.  The 
total  product  of  the  community  would  not  be  af- 
fected by  the  use  or  disuse  of  the  land  in  question. 

But  when  all  the  best  land  is  appropriated,  and  is 
being  cultivated  beyond  the  point  where  diminishing 
returns  begin,  each  acre  of  it  becomes  a  matter  of 
some  consequence  to  the  community.  If  one  is 
withdrawn  from  cultivation,  the  labor  and  capital 
which  were  employed  in  its  cultivation  must  then 
be  employed  either  on  some  other  land  of  the  same 
grade,  increasing  the  intensity  of  its  cultivation  and 
securing  a  smaller  product  under  the  law  of  dimin- 
ishing returns,  or  on  some  of  the  second  best  land 
where  it  can  not  produce  so  much  as  it  had  been 
doing  on  the  best  grade.  The  withdrawal  of  the 
acre  in  question  would  therefore  reduce  the  amount 
which  could  be  produced  in  the  community  by  the 
difference  between  what  it  would  yield  and  what 
the  same  labor  and  capital  could  produce  elsewhere. 
This  would  measure  the  marginal  productivity  of 
the  land  of  the  best  grade,  and  the  marginal  product 
would  determine  the  amount  which  any  one  would 
be  willing  to  pay  for  its  use. 

In  the  last  chapter  we  saw  that  the  wages  of  any 
particular  kind  of  labor  depend  upon  its  marginal 
product,  —  that  is,  upon  the  amount  which  any  given 
unit  could  add  to,  or  subtract  from,  the  product  of 


Rent  191 

the  community  by  beginning  or  stopping  work,  and 
that  this  amount  varies  with  the  number  of  such 
units  as  compared  with  all  the  other  factors.  The 
same  law  appHes  to  the  rent  of  land.  Let  us  for 
the  moment  make  the  extreme  assumption  that  all 
the  land  in  a  certain  community  is  of  absolutely  the 
same  grade,  differences  of  location  being  in  every 
case  exactly  compensated  by  differences  of  fertility 
or  some  other  advantage,  and  that  there  is  an  indefi- 
nite extent  of  it.  Under  such  circumstances  it  would 
not  be  necessary  to  cultivate  any  of  it  beyond  the 
point  of  diminishing  returns;  rather  than  to  do  so 
any  cultivator  would  prefer  to  extend  his  cultivation 
over  more  land.  Under  these  conditions  the  mar- 
ginal productivity  of  land  would  be  nil.  Any  par- 
ticular piece  of  land  could  be  spared  without  loss, 
since  the  labor  and  capital  could  find  other  land  just 
as  good  upon  which  to  employ  themselves,  and  the 
total  product  of  the  community  would  not  suffer  in 
the  least.  But  if  the  amount  of  land  were  so  limited 
that  it  would  be  necessary  to  cultivate  it  beyond 
the  point  of  diminishing  returns  in  order  to  supply 
the  demand  for  products,  then  each  acre  would 
become  a  matter  of  importance.  Its  withdrawal 
from  cultivation  would,  as  already  shown,  drive  the 
labor  and  capital  which  had  been  cultivating  it  over 
upon  the  remaining  land,  increasing  still  further  the 


192  The  Distribution  of  Wealth 

intensity  of  its  cultivation  and  reducing  the  amount 
which  could  be  produced  by  the  community.  And 
the  scarcer  the  land  is,  the  greater  the  resulting  dimi- 
nution in  the  total  product  when  any  given  acre  or 
parcel  of  land  is  withdrawn. 

Referring  again  to  Tables  E  and  F  in  the  last  chap- 
ter, let  us  suppose  that  all  the  land  in  the  community 
is  of  the  grade  of  farm  A,  and  that  there  is  so  little 
of  it  that  two  laborers  have  to  be  employed  on  each 
hundred-acre  farm.  There  would  then  be  a  prod- 
uct of  900  bushels  on  each  farm,  and  the  marginal 
product  of  labor  would  be  400  bushels  per  man.  But 
if  one  such  farm  were  withdrawn  from  cultivation,  the 
two  laborers  who  had  been  employed  in  cultivating 
it  would  have  to  be  employed  on  the  remaining 
farms,  probably  distributing  their  work  over  a  con- 
siderable number.  Under  these  conditions  they  could 
not  add  to  the  product  of  these  remaining  farms 
more  than  800  bushels,  —  theoretically  a  fraction 
less.  There  would  then  be  a  net  loss  of  something 
over  100  bushels  in  the  total  product  of  the  com- 
munity. But  if  there  were  so  many  men  or  so  few 
farms  that  three  laborers  would  have  to  be  employed 
on  each  farm,  the  total  amount  produced  on  each 
farm  would  be  1200  bushels,  and  the  marginal  prod- 
uct of  labor  on  them  all  would  be  300  bushels  per 
man.     Then  if  one  farm  were  withdrawn  from  culti- 


Rent  193 

vation,  these  three  laborers  would  have  to  be  distrib- 
uted over  the  other  farms  where  they  would  add  a 
fraction  less  than  900  bushels  to  the  amount  which 
was  already  being  produced  on  them.  In  this  case  the 
loss  of  the  farm  would  cause  the  community  a  net  loss 
of  something  over  300  bushels.  Thus,  the  more  labor 
there  is  employed  on  each  farm,  and  the  lower  its 
marginal  productivity,  the  greater  the  net  loss  entailed 
by  the  withdrawal  of  any  farm  from  cultivation. 

It  has  sometimes  been  stated  that  rent  is  due  to 
differences  in  the  productivity  of  different  areas  of 
land.^  This,  however,  is  an  unwarranted  interpreta- 
tion of  the  doctrine  of  rent  as  developed  by  Anderson 
and  Ricardo,  who  did  indeed  assume,  and  correctly, 
that  in  any  real  community  there  are  considerable 
differences  in  the  productivity  of  the  land  under 
actual  cultivation,  and  it  was  shown  that  these  differ- 
ences had  something  to  do  in  determining  the  amount 
of  rent.  The  rent  of  a  given  piece  of  land,  for  exam- 
ple, could  not  normally  exceed  the  difference  between 
the  amount  which  could  be  produced  upon  it  and  the 
amount  which  the  same  labor  and  capital  could  pro- 
duce on  the  poorest  land  in  cultivation,  or  upon  land 
so  poor  that  its  use  could  be  had  for  nothing.  But  it 
does  not  follow  from  this  that  rent  is  due  to  these 

1  Walker's  "  Political  Economy,  Advanced  Course,"  3d  Ed.,  N.Y, 
1888,  p.  197. 
o 


194  The  Distribution  of  Wealth 

differences  unless  it  is  merely  meant  that  however 
abundant  and  fertile  the  land  in  any  community  may 
be,  if  there  are  certain  areas  superior  to  the  rest  and 
so  limited  in  extent  as  not  to  fully  satisfy  the  demand 
for  them,  rent  will  be  paid  for  their  use.  It  is  mani- 
festly not  true  that  rent  is  due  to  these  differences  if 
it  is  meant  that  rent  would  not  exist  if  there  were  no 
differences,  —  that  is,  if  land  were  all  of  the  same 
grade.  As  shown  above,  if  such  land  existed  in  such 
limited  quantities  that,  in  order  to  supply  the  demand 
for  goods,  it  was  necessary  to  cultivate  it  beyond  the 
point  of  diminishing  returns,  it  would  all  command 
a  rent.  It  would,  therefore,  be  more  accurate  to  say 
that  rent  is  due  to  the  scarcity  of  land  of  the  better 
grades,  for  this  will  give  rise  to  rent  whether  there 
happen  to  be  inferior  grades  or  not. 

But  if  there  be  inferior  grades  not  yet  in  cultiva- 
tion, some  of  them  good  enough  to  be  worth  cultivat- 
ing if  there  is  only  a  slight  increase  in  the  demand 
for  products,  or  in  the  labor  and  capital  to  be  em- 
ployed, such  an  increase  would  bring  some  of  these 
inferior  grades  into  use  and  reduce  the  pressure  upon 
the  better  grades.  This  will  reduce  the  rent  of  the 
better  grades  below  what  it  would  otherwise  be. 
Looked  at  merely  from  the  standpoint  of  the  law  of 
demand  and  supply,  the  inferior  lands  would  have  to 
be  regarded  as  partial  substitutes  for  the  better  lands, 


Rent  195 

helping  to  satisfy  the  same  demand,  and  therefore  to 
relieve  the  scarcity  of  land. 

Let  the  community  previously  assumed  be  regarded 
as  an  island  community  with  no  available  land  outside, 
and  all  the  land  within  the  island  of  absolutely  the 
same  grade.  As  population  increases,  the  land  must 
be  more  and  more  intensively  cultivated  and,  in  the 
absence  of  new  improvements  in  the  arts  of  pro- 
duction, the  marginal  productivity  of  labor  must  fall 
lower  and  lower.  This,  as  already  shown,  will  make 
the  marginal  productivity  of  land  rise  higher  and 
higher.  But  if  a  new  continent  should  be  discovered 
within  available  distance,  containing  lands  of  various 
grades,  some  of  them  only  a  little  inferior,  all  things 
considered,  to  that  of  the  island,  a  part  of  the  increas- 
ing labor  supply  could  at  once  be  transferred  to  the 
new  lands,  and  a  part  of  the  subsistence  of  the  popu- 
lation be  derived  from  them.  This  would  reduce  the 
intensity  of  cultivation  of  the  island,  raise  the  mar- 
ginal product  of  labor  there,  or  at  least  check  its 
decline,  and  reduce  the  marginal  productivity  of  the 
land.  In  this  sense  the  existence  of  differences  in 
the  productivity  of  different  areas  of  land,  instead  of 
being  a  cause  of  rent,  really  helps  to  reduce  rent,  or 
at  least  to  prevent  its  rise. 

Referring  again  to  Tables  E  and  F  of  the  preceding 
chapter :  If  the  land  were  all  of  the  same  grade  as 


196  The  Distribution  of  Wealth 

farm  A,  and  there  were  three  laborers  for  every  such 
farm,  the  marginal  product  of  labor  would  be  300 
bushels  per  man,  and  that  of  land  300  bushels  per 
farm.  But  if  there  were  an  indefinite  amount  of  ad- 
ditional land  of  the  grade  of  farm  B,  one  man  from 
each  A  farm  would  transfer  his  labor  to  a  B  farm, 
raising  the  marginal  productivity  of  labor  to  400 
bushels  per  man,  and  lowering  that  of  land  to  ICX) 
bushels  for  each  A  farm,  while  the  B  farms  would 
not  have  any  marginal  utility  at  all.  But  it  is  pos- 
sible to  assume  that  a  given  community  has  a  fixed 
number  of  acres  whether  they  are  of  the  same  grade 
or  of  different  grades.  In  this  case,  differences  in 
the  productivity  of  the  land  would  make  the  marginal 
productivity  of  labor  lower  and  that  of  the  better 
grades  of  land  higher  than  they  would  be  if  it  were 
all  of  the  best  grade.  This,  also,  may  be  illustrated  by 
Tables  E  and  F.  If  the  land  were  all  of  the  A  grade, 
and  if  there  were  two  laborers  for  every  such  farm, 
the  marginal  product  of  labor  would  be  400  bushels, 
and  that  of  land  100  bushels  per  farm.  But  if,  with 
the  same  number  of  farms,  half  of  them  were  of  the 
B  grade,  the  second  man  on  each  B  farm  might  con- 
tinue in  the  same  place,  in  which  case  his  marginal 
product  would  be  only  300  bushels,  or  he  might  add 
himself  as  a  third  man  to  one  of  the  A  farms,  in 
which  case  also  his  marginal  product  would  be  only 


Rent  197 

300  bushels.  This  would  then  set  the  rate  for  all  the 
laborers,  and  this,  in  turn,  would  increase  the  mar- 
ginal product  of  the  A  land  to  300  bushels  per  farm. 
Tables  E  and  F  were  constructed  on  the  assump- 
tion that  varying  quantities  of  labor  are  employed 
on  a  fixed  quantity  of  land.  It  is  quite  as  easy  to 
vary  the  proportion  between  the  two  factors  by 
assuming  a  fixed  quantity  of  labor  with  varying  quan- 
tities of  land.  Though  in  actual  life  it  is  not  so  easy 
to  increase  or  decrease  the  amount  of  land  in  the 
community  as  it  is  the  amount  of  labor  or  capital, 
yet  in  any  industrial  establishment,  or  in  any  industry 
as  a  whole,  it  is  quite  as  easy.  Moreover,  in  the 
community  as  a  whole  the  amount  of  land  in  actual 
use  varies  slightly  from  time  to  time  by  reason  of  the 
fact  that  certain  areas  are  withdrawn  from  cultivation 
at  times,  and  again  restored  to  cultivation.  These 
variations  are  sufficient  to  enable  the  community  to 
test  the  marginal  productivity  of  the  land.  By  con- 
structing a  table  on  the  assumption  that  a  fixed  quan- 
tity of  labor  is  employed  on  varying  amounts  of  land, 
we  can  illustrate  the  method  of  finding  the  marginal 
productivity  of  land  as  that  of  labor  was  found  in 
the  preceding  chapter.  The  wages  of  labor  can  then 
be  determined  by  a  method  precisely  similar  to  that 
by  which  rent  was  determined  before,  —  that  is,  by 
subtracting  the  total  rent  from  the  total  product.    This 


198 


The  Distribution  of  Wealth 


would  be  a  reversal  of  the  method  of  Table  F,  and 
ought  to  give  corresponding  results  if  the  land  and 
labor  are  of  the  same  qualities  as  were  assumed  be- 
fore. Table  G  is  an  attempt  in  this  direction,  and 
it  is,  like  Table  F,  derived  from  Table  E ;  though  it 
is,  for  the  sake  of  brevity,  confined  to  the  one  grade 
of  land  represented  by  farm  A. 

''table  G 

Total  Product  and  Marginal  Product  of  Varying  Numbers  of 
Acres  which  may  be  cultivated  by  Five  Men,  reproducing 
THE  Proportions  between  Labor  and  Land  which  were 
given  for  Farm  A  in  Table  E. 


-o 

% 

s 

V 

2  x: 

c< 

1 

1 
1 

SI 

Number  of  bushels  subt 
from  the  product  by  eac 
decrease  of  land 

1 

1 

0. 

"if! 
e 
■g) 
« 

1 

1 
1 

1 
I 
1 

500 

2500 

250 

2250 

250 

250 

I 

250 

2000 

400 

i66i 

2000 

831 

250 

3 

500 

1500 

300 

125 

1750 

41! 

250 

6 

750 

1000 

200 

100 

1500 

25 

250 

10 

1000 

500 

100 

Assuming  a  fixed  number  of  five  laborers,  this 
table  begins  with  500  acres  of  land  of  the  grade  of 
farm  A.      This  reproduces  the  proportion  between 


Rent  199 

labor  and  land  with  which  Table  E  began.  Leaving 
out  of  account  possible  differences  in  the  economy 
of  large-scale  production,  five  men  on  500  acres 
ought  to  produce  five  times  as  much  as  one  man  on 
100  acres.  Accordingly,  the  product  of  this  larger 
combination  is  placed  at  2500  bushels.  Capital  is 
supposed,  as  in  the  former  case,  to  vary  with  the  land, 
or  to  be  a  part  of  the  farm,  and  it  may  therefore  be 
left  out  of  account.  Changing  the  amount  of  land 
to  250  acres  reproduces  the  proportion  between  labor 
and  land  which  we  had  in  the  former  table  when  two 
men  cultivated  icx)  acres  (5  1250 : :  2  :  icx)),  and  ought 
to  produce  proportionally  more,  or  2250  bushels 
(2  :  900 : :  5  :  2250).  Since  five  men  on  500  acres  pro- 
duced 25CXD  bushels,  and  the  same  men  on  250  acres 
produced  2250  bushels,  the  subtraction  of  250  acres 
reduced  the  product  by  the  amount  of  250  bushels. 
This  is  the  amount  which  would  have  to  be  attributed 
to  the  250  acres,  and  it  would  approximately  deter- 
mine the  amount  which  the  five  men  could  afford  to 
pay  for  that  amount  of  land,  making  a  rental  of  one 
bushel  per  acre.  Since  the  land  is  all  of  the  same 
grade,  and  one  acre  is  as  good  as  another,  this  is  the 
amount  per  acre  which  they  would  pay  for  the  re- 
maining 250  acres.  Their  total  rent  will  therefore  be 
250  bushels,  leaving  a  total  sum  for  wages  of  2000 
bushels,  or  400  bushels  per  man. 


200  The  Distribution  of  Wealth 

Again,  by  further  reducing  the  number  of  acres  to 
i66J,  we  reproduce  the  proportion  between  labor  and 
land  which  we  had  in  the  former  table  when  three 
men  worked  on  lOO  acres  (5  :  i66| : :  3  :  100).  Since 
three  men  on  100  acres  produced  1200  bushels,  five 
men  on  166 J  acres  ought  to  produce  2000  bushels 
(3  :  1200: :  5  :  2000).  In  this  case  the  further  reduc- 
tion of  83^^  in  the  number  of  acres  would  cause  a  fur- 
ther reduction  of  250  in  the  number  of  bushels,  or  three 
bushels  per  acre.  This  is  the  amount  per  acre  which 
the  five  laborers  could  afford  to  pay  rather  than  to 
have  their  acreage  cut  down,  or  to  secure  a  larger 
acreage  after  it  was  cut  down.  This  would  also  fix  for 
the  time  the  rent  of  the  remaining  i66|  acres,  making 
a  total  rent  of  500  bushels,  and  leaving  a  total  of  1500 
bushels  for  wages,  or  300  bushels  per  man.  And  so 
the  table  proceeds  until  it  ends,  as  did  Tables  E  and 
F,  with  five  men  on  100  acres  producing  a  total  crop 
of  1500  bushels,  each  reduction  in  the  number  of 
acres  bringing  about  a  reduction  in  the  amount  pro- 
duced. By  attributing  the  reduction  in  the  product 
in  each  case  to  the  reduction  in  the  amount  of  land, 
we  can  determine  the  virtual  product  of  the  land  (or 
the  marginal  product  as  economists  are  wont  to  call 
it)  by  what  logicians  call  the  "method  of  differ- 
ence," and  wages  by  a  variety  of  the  "  method  of 
agreement."      In  Table  F  wages  were  found  by  the 


Rent  20 I 

"method  of  difference"  and  rent  by  the  ** method 
of  agreement."  ^ 

Tables  F  and  G  illustrate  two  methods  of  deter- 
mining the  share  of  any  factor  in  distribution.  One 
is  to  find  its  marginal  product  by  varying  its  amount 
and  attributing  the  resulting  variation  in  the  amount 
of  the  product  to  the  variation  in  the  factor  in  ques- 
tion, there  being  every  reason  for  believing  that  this 
will  measure  the  sum  which  can  profitably  be  paid 
for  that  amount  of  the  factor  which  is  added  or  sub- 
tracted. The  other  is  to  first  find  the  marginal  pro- 
ductivity of  the  other  factors  and  to  determine  from 
this  their  total  earnings.  Whatever  surplus  remains 
after  subtracting  the  total  earnings  of  the  other 
factors  from  the  total  product  would  then  be  the 
share  of  the  factor  in  question.  It  has,  however, 
been  questioned  whether  these  two  methods  would 
give  the  same  result ;  ^  but  a  comparison  of  these  two 
tables,  or  of  any  others  which  fairly  represent  the 
law  of  diminishing  returns,  ought  to  effectually  dis- 
pose of   this  question,  for  it  will  be  found  that  the 

1  Cf.  J.  S.  Mill,  «  System  of  Logic,"  Book  III,  Ch.  VIII. 

2  E.g.,  Mr.  R.  S.  Padan,  in  an  article  entitled  "J.  B.  Qark's  For- 
mulae of  Wages  and  Interest,"  in  the  Journal  of  Political  Economy  for 
March,  1901,  claimed  that  no  such  harmony  between  the  two  methods 
had  been  shown  to  exist.  Professor  Clark,  however,  relied  upon  dia- 
grams rather  than  tables,  and  the  harmony  is  not  so  demonstrable  by 
that  method. 


202  The  Distribution  of  Wealth 

results  are  exactly  the  same  in  either  case,  whether 
applied  to  the  determination  of  one  share  or  the 
other. 

Both  tables  serve  to  illustrate  expUcitly  the  work- 
ing of  the  law  of  joint  demand  as  applied  to  land 
and  labor.  They  show  with  some  degree  of  definite- 
ness  how  an  increase  in  the  supply  of  one  factor 
tends,  other  things  equal,  to  increase  the  demand 
for,  and  the  price  of,  the  other  factor  or  factors 
which  cooperate  with  it  in  production.  The  demand 
for  any  factor  being  based  upon  its  marginal  product, 
anything  which  increases  that  marginal  product  will 
increase  the  demand  for  it.  This  is  a  law  which 
applies  to  capital  also,  as  well  as  to  land  and  labor. 

The  proposition  that  rent  is  due  to  the  productiv- 
ity of  land  does  not  by  any  means  carry  with  it  the 
proposition  that  it  is  due  to  the  productivity  of  land- 
owners. Their  income,  consisting  as  it  does  of  the 
rent  of  land,  may,  and  sometimes  does,  come  to 
them  without  their  having  performed  any  useful 
function  in  industry  or  in  society  at  large.  They 
may,  however,  and  usually  do,  contribute  something 
useful  by  which  their  incomes  are  increased  above 
the  mere  rent  of  their  land.  They  may,  for  example, 
cultivate  their  own  land  or  do  some  other  useful  work, 
such  as  the  management  of  their  estates,  or  they  may 
expend   labor  and  capital  in   placing   improvements 


Rent  203 

upon  their  land,  in  either  of  which  cases  they  earn 
something  in  addition  to  the  rent  of  their  land, 
though  it  may  come  to  them  in  a  form  which  is  in- 
distinguishable from  rent.  In  so  far  as  they  are 
merely  receivers  of  rent,  landowners  are  mere  para- 
sites, receiving  a  share  of  the  product  of  the  industry 
of  others  and  lending  no  aid  in  return,  unless  per- 
mitting their  land  to  be  used  can  be  considered  as 
lending  aid  in  the  work  of  production.  But  inasmuch 
as  they  did  not  create  the  land,  but  were  permitted 
to  become  its  owners  by  the  laws  of  society,  they  can 
hardly  be  regarded  as  contributing  anything  to  society 
when  they  in  turn  permit  their  land  to  be  used. 

However,  the  function  of  the  landowner  is  not 
necessarily  a  barren  one  except  when  he  abuses 
the  power  placed  in  his  hands  or  fails  to  meet  the 
responsibility  which  such  power  places  upon  him. 
Those  who  use  land  which  they  do  not  own  are 
notoriously  wasteful  of  its  resources,  having  a  view 
to  their  immediate  gain  rather  than  the  permanent 
value  of  the  land,  and  they  have  to  be  restrained 
from  ruining  the  land  by  the  oversight  of  some 
one  who  has  a  deeper  interest,  or  by  stipulations 
in  the  contract  under  which  they  are  allowed  to 
use  it.  Some  one  must  take  the  responsibility  of 
guarding  against  this  tendency  tg. .exploit  the  land, 
and  there  are  but  two  ways  of  securing  this.     One 


204  The  Distribution  of  Wealth 

vis  for  the  government  to  keep  control  of  the  land 
^  and  fix  the  rules  for  its  utilization,  regulating  by 
laws  that  are  somewhat  general  in  character  such 
matters  as  the  rotation  of  crops  and  the  manuring 
of  the  land,  in  the  case  of  agricultural  land,  and 
the  work  of  excavation  and  building,  in  the  cas_e_of 
city  land.  The  other  is  to  turn  the  land  over  to 
/  private  owners,  trusting  that  their  self-interest  and 
their  regard  for  the  welfare  of  their  families  will 
prompt  them  to  look  out  for  the  preservation  of 
the  energies  of  the  soil.  .  On  the  whole,  the_latter_ 
method  has  proved  to  be  the  more  successful,  es- 
pecially in  the  case  of  agricultural  land.  The 
ownership  of  land  has  a  wonderfully  stimulating 
effect  upon  the  economic  virtues  of  thrift  and  fore- 
sight. "The  magic  of  property  turns  sand  into 
gold." 

There  are  other  results,  some  good  and  some 
bad,  which  follow  from  a  system  of  private  prop- 
erty in  land,  the  discussion  of  which  would  take  us 
too  far  into  the  fields  of  politics  and  sociology. 
It  may  be  mentioned,  however,  that  such  a  system 
undoubtedly  gives  a  greater  stability  to  society  than 
could  be  secured  without  it,  as  landowners  are  a 
proverbially  conservative  class.  At  the  same  time 
it  gives  greater  flexibility  and  adaptability  in  the 
management   of    the    land    than    could   be   secured 


Rent  205 

through  any  governmental  machinery  which  would 
adequately  prevent  the  wasteful  exploitation  of  the 
land.  Again,  it  is  probable  that  any  country  will 
be  more  stubbornly  defended  against  foreign  in- 
vasion by  a  population  made  up  largely  of  land- 
owners than  by  any  other  kind  of  a  population, 
though  there  may  be  some  doubt  about  this,  and  it 
is  growing  of  less  importance  even  if  true.  Finally, 
the  system  of  private  ownership  helps  to  develop  a 
leisure  class  which  may  be  a  blessing  or  a  curse, 
according  to  the  way  in  which  it  chooses  to  spend 
its  leisure.  It  is  only  necessary  to  point  out  that 
most  of  the  arts  and  graces  of  civilization,  as  well 
as  most  of  its  vices,  have  grown  up  because  there 
have  been  some  who  had  time  to  think  about 
other  things  than  the  earning  of  their  daily  bread. 
We  are  for  the  present  concerned  primarily 
with  the  nature  of  rent,  why  it  accrues,  and  the 
laws  by  which  its  amount  is  determined.  As  to|  \ 
the  first  question,  we  have  found  that  rent  is  that  \ ) 
income  which  is  derived  from  the  ownership  of 
an  original  and  natural  agent  of  production ;  as  to 
the   second,  that  it  accrues   because   that   agent  is 

scarce;   and   as   to  the  third,  that   the   amount   of  1 

. ...       -   |i 

rent  is  determined   by  the  joint   operation   of   the  |\ 
productiveness  and  the   scarcity  of   land,   being   in 
each    individual    case    determined    by   the    amount 


iJMM/r  J.15 


2o6  The  Distribution  of  Wealth 

which  the  use  of  the  particular  piece  of  land  in 
question  adds  to  the  product  which  could  be 
secured  without  it,  and  this  amount  itself  being 
determined  by  the  amount  of  land  of  that  grade  as 
compared  with  all  the  other  factors  with  which  it  co- 
operates in  the  work  of  production,  —  in  other  words, 
by  the  marginal  productivity  of  that  grade  of  land. 
This  is  only  another  way  of  stating  the  classic  law 
of  rent,  viz.,  that  the  rent  of  any  given  piece  of  land 
is  what  it  will  produce  over  and  above  what  could 
be  produced  on  the  poorest  land  in  cultivation  by 
the  same  amount  of  labor  and  capital ;  for  this  differ- 
ence is  one  way  of  measuring  the  amount  which  the 
piece  of  land  in  question  adds  to  the  product  of  the 
community  over  and  above  what  could  be  produced 
without  it. 

It  has  sometimes  been  argued  that  rent  does  not 
enter  into  the  price  of  products,  on  the  ground  that  if 
rents  were  remitted  by  landlords,  the  tenants  would 
simply  pocket  the  amounts  and  make  no  reduction  in 
the  price  of  their  products  on  their  wares.  The  price 
of  goods  being  determined  by  demand  and*  supply, 
the  remission  of  rents  would  make  no  difference  in 
either  factor.  It  would  not  reduce  the  number  of 
consumers,  nor  the  strength  of  their  desires,  nor  the 
length  of  their  purses  on  the  average.  Nor  would  it 
increase  the   amount  of   land,  labor,  or   capital   by 


Rent  207 

which  the  supply  of  products  could  be  increased, 
nor  would  it  cause  any  of  these  factors  to  work  any 
harder.  But  this  does  not  constitute  a  valid  distinc- 
tion between  rent  and  the  other  shares  in  distribution 
for  the  reason  that  all  that  was  said  about  the  re- 
sults, or  absence  of  results,  of  a  remission  of  rents, 
could  be  repeated  concerning  a  remission  of  wages 
by  the  laborers  or  of  interest  by  the  capitalists. 
In  either  case  the  employers  would  simply  pocket 
their  gains  and  go  on  selling  as  before,  at  what- 
ever the  market  would  stand.  The  market  as  a 
whole  would  not  be  affected  in  this  case  any  more 
than  in  the  case  of  the  remission  of  rent,  though 
there  would  doubtless  be  a  change  in  the  relative 
values  of  different  commodities  because  of  changes 
in  the  purchasing  power  of  different  classes  of  con- 
sumers. The  remission  of  wages  would  not  increase 
the  amount  of  labor  to  be  had,  and  consequently 
would  not  increase   the   supply   of   products. 

There  is,  however,  a  sense  in  which  wages  do 
enter  into  the  price  of  products  and  in  which  rent 
does  not.  Laborers  have  to  be  persuaded  to  work 
by  some  offer  of  advantage  to  themselves,  but  land 
does  not.  It  is  true  that  landlords  may  have  to  be 
persuaded,  but  there  would  be  land  if  there  were 
no  landowners  whereas  there  would  be  no  labor  if 
there  were  no  laborers.      Labor  is  inseparable  from 


2o8  The  Distribution  of  Wealth 

laborers,  but  land  is  separable  from  landowners. 
Therefore  the  three  following  propositions  may  be 
laid  down  respecting  labor,  i.  In  order  that  there 
may  be  production  there  must  be  labor.  2.  In  order 
^that  there  may  be  labor  there  must  be  wages  to^  per- 
suade men  to  work,  and  to  enable  them  to  do  so, 
otherwise  there  will  be  no  labor  and  no  production. 
3.  Therefore  wages  are  necessary  in  order  to  secure 
the  production  of  goods,  —  in  other  words,  they  are  a 
necessary  part  of  the  cost  of  production.  Since  the 
cost  of  production  is  an  important  factor  in  determin- 
ing the  supply  of  products,  and  the  supply  is  one  of 
the  factors  in  determining  their  price,  it  is  seen  that 
wages  have  an  important  and  necessary  part  in  the 
price-making  process. 

Obviously  no  such  propositions  as  the  second  and 
third  can  be  made  respecting  rent.  It  is  not  neces- 
sary that  any  one  should  receive  rent  in  order  that 
there  may  be  land,  and  rent  is  not  therefore  necessary 
in  order  that  there  may  be  production.  Rent  is 
wholly  a  result  of  production,  and  not  a  cause  also, 
whereas  wages  are  a  cause  as  well  as  a  result.  They 
are  a  cause  in  the  sense  that  unlike  rent  they  are  a 
means  of  securing  one  of  the  conditions  of  produc- 
tion, and  they  are,  like  rent,  a  result  in  the  sense  that 
they  can  be  paid  only  on  condition  that  there  is  pro- 
duction. (  Therefore  rent  is   not,   as   wages    are,   a 


Rent  109 

necessary  jhare  in  the  cost  of  production.!  Under  a 
system  which  forbade  any  one  to  receive  an  individ- 
ual reward  for  working  there  would  be  no  work  done, 
or  at  least  only  so  much  as  could  be  done  under  the 
form  of  play  ;  but,  under  a  system  which  forbade  any 
one  to  receive  an  individual  reward  for  the  use  of 
land,  there  would  be  just  as  much  land  as  now,  bar- 
ring a  few  relatively  insignificant  cases  where  land  is, 
in  a  certain  sense,  *'  made."  Even  taking  account 
of  such  cases,  the  difference  of  degree  is  so  great 
between  rent  and  wages  as  to  make  the  two  cases 
non-comparable. 

A  public  policy  which  forbade  wages,  or  appropri- 
ated them  for  public  purposes,  would  be  suicidal  in 
that  it  would  at  once  stop  production,  whereas  a 
policy  which  would  appropriate  rents  for  public  pur- 
poses would  not  be  suicidal  in  the  same  sense  because, 
if  only  pure  economic  rent  were  taken,  leaving 
untouched  all  that  could  be  attributed  to  labor, 
foresight,  or  enterprise,  it  would  not  affect  produc- 
tion at  all,  though  it  might  conceivably  bring  other 
undesirable  results.  This  is,  after  all,  the  most 
important  reason  for  distinguishing  rent  from  other 
forms  of  income.  A  purely  academic  discussion 
might  safely  ignore  such  distinctions  as  exist  and 
treat  rent  as  it  chose  ;  but  however  rigidly  analytical, 
or  even  mathematical,  our  study  of  economics  may 


2IO  The  Distribution  of  Wealth 

become,  we  must  not  forget  that  such  studies  are  of 
value  only  in  so  far  as  they  throw  Hght  upon  some 
question  of  public  policy.  The  distinction  just  men- 
tioned will  throw  light  on  certain  important  questions 
connected  with  taxation. 

The  rent  of  such  lands  as  are  used  for  pleasure 
grounds  and  dwelling  sites  requires  no  such  elabo- 
rate  analysis  as  has  been  given  to  that  of  lands 
used  for  purposes  of  production.  The  former  class 
does  not  differ,  so  far  as  the  laws  of  value  are 
concerned,  from  ordinary  articles  of  consumption. 
They  furnish  their  utilities  directly,  and  the  law  of 
marginal  utility,  as  outlined  in  the  first  chapter,  de- 
termines their  value.  That  which  is  paid  for  their 
use  is  merely  the  price  of  the  flow  of  utilities  which 
they  furnish  to  their  users,  and  these  utilities  decline 
as  they  increase  in  abundance  because  of  the  rela- 
tive satiation  of  the  wants  which  they  gratify. 
Therefore  we  may  pass  such  lands  by  with  the 
remark  that  they  and  their  utilities  come  under  the 
ordinary  laws  of  value  and  price  which  was  applied 
to  other  consumers'  goods  in  the  first  chapter. 

The  factors  which  determine  the  supply  of  land 
are  comparatively  simple,  and  require  no  such  elabo- 
rate explanation  as  is  necessary  in  the  case  of  both 
labor  and  capital.  Nature  has  fixed  for  any  one 
generation  of   men    the   land   supply  of    the  earth. 


Rent  211 

and  they  can  do  very  little  to  increase  or  decrease 
it.  Geological  changes  which  affect  the  land  sur- 
face go  on  so  slowly  as  compared  with  the  fleeting 
life  of  man  that  he  is  compelled  to  regard  them 
as  non-existent  from  the  standpoint  of  his  present 
economy.  But  any  given  population  can  make  a 
larger  section  of  the  earth's  surface  available  for 
its  own  uses.  The  people  may  scatter  themselves 
over  a  wider  area,  or  they  may  construct  transpor- 
tation systems  and  lines  of  communication  which 
will  enable  them  to  gather  subsistence  from  a  wider 
area,  confining  themselves  to  those  occupations 
which  require  less  space.  Both  methods,  however, 
are  likely  to  be  at  the  expense  of  some  other  popu- 
lation or  race,  and  neither  is  likely  to  prove  an 
effective  method  of  increasing  the  world's  supply 
of  land.  Again,  new  methods  may  be  found  by 
which  space  may  be  economized  in  the  way  of 
intensive  farming  and  the  construction  of  taller 
buildings;  but  these  are  methods  of  decreasing  the 
demand  for  land  rather  than  of  increasing  its  sup- 
ply. Finally,  certain  small  areas  may  be  reclaimed 
from  the  sea,  the  swamp,  or  the  desert,  and  these 
may  be  regarded  as  practical  additions  to  the  land 
supply ;  but  these  additions  are  so  small  as  not 
to  affect  the  market  for  land  to  any  appreciable 
extent   outside  of   such  countries   as  Holland.  ;  We 


212  The  Distribution  of  Wealth 

may  conclude,  therefore,  that  land  is  a  factor 
whose  supply  is  practically  fixed  by  nature  rather 
than  by  human  effort. 

COLLATERAL   READING 

David  Ricardo,  Political  Economy,  Chapters  II-III. 

Alfred  Marshall,  Principles  of  Economics,  Book  VI,  Chap- 
ters IX-X. 

J.  H.  Hollander,  The  Concept  of  Marginal  Rent,  Quarterly 
Journal  of  Eco?tomics,  Vol.  IX,  p.  175  et  seq. 

F.  A.  Fetter,  The  Passing  of  the  Old  Rent  Concept,  Quarterly 
Journal  of  Economics^  May,  1901. 


CHAPTER  VI 

INTEREST 

We  now  come  to  the  most  difficult  and  elusive 
problem  in  distribution,  namely,  that  of  the  nature 
and  cause  of  interest,  and  it  is  therefore  necessary 
to  proceed  slowly  with  our  analysis.  JWe  may 
begin  by  defining^  interest  as  the  income  which 
capital  returns  to  its  owner  whether  he  lends  it  or 
employs  it  himself  in  his  own  business.  )  There  are 
three  forms  in  which  this  income  may  be  returned. 
In  the  first  place,  it  may  come  as  payment  for  the 
loan  of  a  general  fund  of  wealth.  Such  a  loan 
usually  takes  the  form  of  money  or  some  substi- 
tute for  money,  such  as  a  credit  instrument.  In 
either  case  the  borrower  exchanges  the  thing  which 
is  technically  borrowed  for  the  other  goods  which 
were  the  real  objects  of  his  borrowing.  From  his 
point  of  view,  money  fulfils  the  character  which 
Aristotle  ascribed  to  it,  —  that  of  serving  merely  as 
a  claim  upon  society  for  a  share  of  the  general  fund 
of  wealth  in  its  possession.  In  the  second  place, 
the  capitalist's  income  may  be  received  for  the  loan 

213 


214  The  Distribution  of  Wealth 

of  certain  specific  pieces  of  capital  such  as  build- 
ings and  machinery ;  and,  in  the  third  place,  itjmay 
be  secured  from  the  use  of  capital<.Jn  .his_own 
business. 

In  popular  language,  only  the  first  form  of  the 
capitalist's  income  is  invariably  called  interest.  The 
second  is  called  either  rent  or  interest,  and  the  third 
either  profits  or  interest.  But  since  they  are  all  alike 
in  being  derived  from  the  ownership  of  capital,  econo- 
mists have  generally  chosen  to  call  them  all  by  one 
name,  and  have  chosen  interest  as  that  name,  re- 
serving the  word  "rent"  for  the  income  derived  from 
the  ownership  of  land,  and  profits  for  an  income 
which  has  been  variously  described,  but  which  usu- 
ally has  some  connection  with  the  peculiar  function 
of  the  independent  business  man  himself  rather  than 
with  that  of  his  land  or  capital. 

But  if  we  are  to  extend  the  definition  of  interest  in 
this  way,  care  must  be  taken  not  to  include  too  much. 
In  the  case  of  a  loan  of  money,  or  of  a  general  fund 
of  capital,  only  the  excess  paid  back  to  the  lender 
over  and  above  the  amount  which  was  borrowed  is 
called  interest.  In  other  words,  interest  is  the 
amQiuit  which  the  owner  receives  in  excess  of  the- 
sum  necessary  to  preserve  the  supply  of  his  capital 
intact.  In  the  case  of  a  loan  of  money,  this  is  made 
perfectly  clear  by  the  customs  of  the  market  which 


Interest  215 

name  the  one  part  interest  and  the  other  part  princi- 
pal. But  in  the  case  of  a  loan  of  specific  forms  of 
capital,  and  in  that  of  capital  which  is  used  by  its 
owner,  no  such  distinction  is  made.  The  owner  gets 
his  income  in  an  undifferentiated  sum,  and  he  must 
use  his  own  discretion  about  keeping  up  repairs  or 
otherwise  preserving  the  supply  of  his  capital  from 
exhaustion.  Yet,  logically,  only  the  excess  of  his 
gross  income  over  and  above  the  amount  necessary 
for  that  purpose  can  strictly  be  called  interest.  The 
gross  income  in  such  cases  resembles  somewhat  the 
royalty  which  is  paid  for  the  privilege  of  working  a 
mine,  a  part  of  which  is  to  compensate  for  the  de- 
terioration of  the  mine  through  the  exhaustion  of  the 
mineral,  and  only  the  remaining  part  being  rightly 
called  either  rent  or  interest,  though,  of  course,  the 
value  of  the  mine  cannot  be  preserved  intact,  and 
the  owner  must  use  that  which  he  receives  from  it 
by  purchasing  other  productive  wealth  if  he  is  to  pre- 
serve the  amoimt  of  his  wealth  intact. 

Since  interest  exists  only  when  the  gross  income 
from  capital  is  more  than  sufficient  to  replace  it 
or  to  keep  its  supply  intact,  a  complete  explanation 
of  the  interest  problem  must  therefore  answer  two 
distinct  questions :  first.  Why  does  capital  return  an 
income  to  its  owner }  and  second,  Why  is  this  income 
more  than  sufficient  to  keep  the  supply  of  capital  in- 


ai6  The  Distribution  of  Wealth 

tact,  or  to  replace  it  when  it  is  worn  out  or  otherwise 
passes  from  the  possession  of  its  owner  ?  The  latter 
is  the  true  interest  problem,  but  it  cannot  possibly 
be  answered  without  first  answering  the  former.  It 
would  not  be  very  inaccurate  to  say  that  capital 
earns  two  sums  for  its  owner:  first,  a  sum_for  re- 
jplacing  itself,  and  second,  a  further  sum  as  an  extra 
(reward  for  the  capitalist.  Both  sums  need  to  be 
accounted  for,  but  the  second  is  the  one  in  which 
thej)roblem  of  interest  finally  centres. 

First,  Why  does  capital  earn  an  income  of  any 
kind  for  its  owner? 

That  capital  is  productive  has  often  been  ques- 
tioned, but  no  one  would  deny  that  tools  and  other 
materials  of  production  are  useful;  yet  these  two 
propositions  mean  exactly  the  same  when  correctly 
understood.  Capital  consists  primarily  of  tools  and 
other  materials  of  production,  and  such  things  are 
useful  only  in  so  far  as  they  add  something  to  the 
product  of  the  community.  Find  out  how  much  can 
j  be  produced  without  any  particular  tool  or  machine, 
and  then  how  much  can  be  produced  with  it,  and  in 
the  difference  you  have  the  measure  of  its  produc- 
tiveness. This  is  also  the  only  measure  of  its  useful- 
ness, since  it  is  useful  only  in  production.  Moreover, 
»this  is  the  only  way  in  which  the  productiveness  of 
labor  or  any  other  factor  can  be  determined. 


Interest  lij 

It  will  be  readily  understood  that  this  is  quite  dif- 
ferent from  saying  that  the  productiveness  of  labor 
in  general,  or  of  capital  in  general,  can  be  determined 
by  withdrawing  all  labor  or  all  capital  from  industry, 
and  then  attributing  the  diminution  in  the  product 
entirely  to  the  factor  which  was  withdrawn.  As 
pointed  out  many  times  already,  the  market  does  not 
deal  with  things  in  general,  but  with  specific  units 
of  specific  commodities  or  agents  of  production. 
Ignorance  of  this  elementary  fact  is  responsible  for 
a  great  deal  of  faulty  reasoning  in  the  discussion  of 
some  of  the  problems  of  distribution.  To  withdraw 
all  labor  from  industry  would,  of  course,  destroy 
the  whole  product.  This  is  made  the  basis  of  the 
claim  that  labor  alone  is  productive.  It  is  argued 
that  if  there  were  no  labor,  there  would  be  no  prod- 
uct, and  that  capital  is  absolutely  barren  except 
when  directed  by  labor.  If  this  proves  that  labor  is 
the  creator  of  the  whole  product,  it  can  be  proved  by 
the  same  method  that  land  is  the  creator  of  the 
whole  product ;  for  if  there  were  no  land,  there  would 
be  no  product,  nor  any  labor  either  for  that  matter. 
Similarly,  if  there  were  no  capital,  there  would  be 
very  little  product.  Destroy  all  the  tools  and  other 
instruments  of  production,  and  the  product  of  indus- 
try during  the  next  year  would  be  exceedingly  small. 
But  no  one  would  claim  that  the  whole  amount  by 


21 8  The  Distribution  of  Wealth 

which  the  product  was  diminished  was  the  product  of 
capital  alone,  and  that  only  the  small  amount  which 
could  be  produced  without  any  capital  was  the  prod- 
uct of  land  and  labor.  Such  an  opinion  would, 
however,  be  quite  as  intelligent  as  the  claim  that 
labor  alone  is  productive. 

To  be  sure,  not  all  capital  consists  of  tools,  nor 
even  of  instruments  of  production.  Some  of  it 
consists  of  consumers'  goods,  which  are  loaned, 
rented,  or  hired,  and  from  which  the  owner  de- 
rives an  income.  Nevertheless,  the  sweeping 
denial  that  capital  is  productive  carries  with  it  the 
denial  that  tools  are  aids  in  production,  which 
would  be  too  absurd  to  discuss.  Rather  than 
attribute  such  an  opinion  to  any  one,  we  ought  to 
find  out,  if  possible,  whether  those  who  deny  the 
productivity  of  capital  do  not  misapprehend  the 
real  nature  of  capital.  It  will  generally  be  found 
that  they  are  not  thinking  of  tools  or  concrete 
instruments  of  production,  but  of  a  general  fund 
of  value,  mistaking  the  quantitative  expression  of 
capital  for  the  capital  itself.  If  they  mean  that 
this  fund  of  value  does  not  produce  anything,  they 
are  quite  right,  since  capital  has  value  solely 
because  it  is  productive  (leaving  out  of  account 
that  small  share  which  consists  of  consumers' 
goods).      It   would    therefore   be   more   accurate   to 


Interest  219 

say  that  its  value  is  due  to  its  productiveness  than 
that  its  productiveness  is  due  to  its  value.  The 
latter  is  probably  what  is  meant  when  it  is  denied 
that  capital  —  meaning  its  value  or  amount,  as 
that  amount  is  popularly  expressed  —  is  productive. 
However,  capital  is  not  value  but  things. 

Confining  our  attention  for  the  present  to  that 
part  of  capital  which  consists  of  producers'  goods, 
it  is  safe  to  say  that  its  use  is  wanted  only  for  the 
sake  of  what  it  will  add  to  the  income  of  him  who 
uses  it  rather  than  for  the  sake  of  any  direct 
satisfaction  which  it  may  afford.  It  is  because  of 
this  income  that  the  user  will  sometimes  borrow 
capital  and  pay  a  price  for  its  use.  And,  gen- 
erally speaking,  the  owner  who  uses  his  own  capi- 
tal prizes  it  for  the  sake  of  the  income  which  it 
brings  him.  But  an  instrument  of  production  adds 
to  the  income  of  him  who  uses  it  only  by  enabling 
him  to  produce  more  than  he  could  without  it. 
The  more  it  will  add  to  his  product,  the  more  he 
wants  the  use  of  it,  and,  consequently,  the  more  its 
use  is  worth.  The  amount  which  it  adds  to  the 
product  of  its  owner  when  he  uses  it  himself  is, 
of  course,  the  amount  which  it  adds  to  his  income ; 
and  the  amount  which  it  adds  to  the  product  of  the 
one  who  borrows  it  is  approximately  the  amount 
which  he  can  afford  to  pay  for  its  use. 


220  The  Distribution  of  Wealth 

The  productivity  of  capital  is,  like  that  of  land 
and  labor,  subject  to  the  principle  of  marginal  pro- 
ductivity, which  is,  as  we  have  seen,  a  part  of  the 
general  law  of  diminishing  returns.  Increase  the 
number  of  instruments  of  a  given  kind  in  any 
industrial  estabHshment,  leaving  everything  else 
in  the  establishment  the  same  as  before,  and  you 
will  probably  increase  the  total  product  of  the 
establishment  somewhat,  but  you  will  not  increase 
the  product  as  much  as  you  have  the  instruments 
in  question.  Introduce  a  few  more  looms  into  a 
cotton  factory  without  increasing  the  labor  or  the 
other  forms  of  machinery,  and  you  will  add  a 
certain  small  amount  to  the  total  output.  There 
will  be  a  few  of  the  workmen  who  can  tend  more 
than  the  normal  number  of  looms  and  turn  out  a 
fraction  more  work  than  with  the  regular  number. 
But  they  will  not  be  able  to  make  each  loom  turn 
out  as  much  work  as  before.  The  problem  of  the 
manager  is  to  apportion  the  men  and  the  looms 
in  that  ratio  which  will  turn  out  the  largest  prod- 
uct in  proportion  to  the  total  cost;  and  he  is 
therefore  not  intent  on  getting  either  the  maxi- 
mum per  man  or  the  maximum  per  loom.  If  he 
were  intent  upon  the  former,  he  would  use  many 
more  looms  than  at  present,  and  in  the  latter  case 
he  would  put  one  man  in  charge  of  each   loom  in 


Interest  221 

order  to  run  it  at  its  maximum  speed  with  as  few 
stops  as  possible.  One  man  with  two  looms  would 
turn  out  more  per  man,  but  slightly  less  per  loom, 
because  there  would  be  a  few  more  stops.  One 
man  with  four  looms  would  turn  out  still  more 
per  man,  but  still  less  per  loom,  and  so  on.  This 
means  that  the  marginal  product  of  looms,  or  the 
amount  which  each  loom  would  add  to  the  total 
product  of  the  combination,  diminishes  as  looms 
increase  in  comparison  with  labor  and  other  factors 
of  production.  That  which  is  true  of  looms  in 
this  particular  is  also  true  of  ploughs  on  a  farm, 
of  locomotives  on  a  railway,  of  floor  space  in  a 
store,  and  of  every  other  form  of  capital  used  in 
industry. 

All  this  is  as  true  of  the  community  as  a  whole  as 
it  is  of  a  single  establishment.  If,  for  example,  there 
are  very  few  ploughs  in  a  given  community  where 
there  is  an  abundance  of  land,  labor,  and  other 
capital,  each  plough  would  be  a  matter  of  consider- 
able importance.  Each  one  would  have  to  be  used 
intensively,  and  the  withdrawal  of  one,  or  the  making 
of  another,  would  make  a  considerable  difference  in 
the  amount  of  certain  things  which  the  community 
would  be  able  to  produce.  But  with  a  larger  number 
of  ploughs,  other  factors  remaining  the  same,  each 
one  would   be   used   less   intensively,   and   the 


222  The  Distribution  of  Wealth 

of  one  or  the  addition  of  another  would  make  less 
difference  in  the  product  of  the  community. 

This  principle  may  be  broadened  so  as  to  include 
all  capital  in  the  same  class.  An  increase  in  the  total 
amount  of  capital  may  be  conceived  as  coming  about 
through  the  proportional  increase  of  all  the  various 
forms  of  capital  at  the  same  time.  In  fact,  this  is 
the  way  in  which  it  would  normally  come  about  in 
the  absence  of  inventions  of  new  kinds  of  capital  or 
of  new  uses  for  the  old  kinds.  If  the  capital-making 
process,  which  will  be  explained  later,  increases  with- 
out any  new  inventions  to  give  it  new  directions  in 
which  to  increase,  it  is  to  be  expected  that  all  the 
existing  forms  of  capital  would  increase  in  some- 
thing like  the  same  proportion.  Then  if  labor  and 
land  were  to  remain  the  same,  or  to  increase  less 
rapidly  than  capital,  such  an  increase  of  capital 
would  reduce  the  marginal  productivity  of  each  and 
every  form  of  capital.  There  would  be  less  land 
upon  which  to  use  each  tool,  and  less  labor  to  use  it. 
The  marginal  productivity  of  ploughs  in  the  previous 
illustration  would  diminish  when  there  were  more 
ploughs  in  proportion  to  the  labor  and  land,  even 
though  the  number  of  other  instruments  of  produc- 
tion increased  proportionally  with  the  ploughs.  The 
same  would  be  true  of  every  other  form  of  capital, 
and,  consequently,  the  proposition  is  established  that 


Interest 


223 


the  marginal  productivity  of  capital  in  general  de- 
creases as  the  amount  of  capital  increases  relatively 
to  land  and  labor. 

The  working  of  the  law  of  marginal  productivity  as 
applied  to  capital  might  be  illustrated  by  means  of 
tables  similar  to  Tables  E,  F,  and  G  in  the  previous 
chapters  ;  but  the  whole  matter  ought  to  be  clear 
enough  by  this  time.     The  following  diagram  will, 


E 

B 

""-^^ 

B' 

^  -> 

3^ 

A 

D           I 

y 

y                       c 

DIAGRAM   I 

however,  serve  both  as  an  illustration  of  this  law  and 
as  a  means  of  introducing  the  next  question  to  be 
considered  in  the  general  problem  of  interest. 

Let  the  amount  of  capital  in  the  industrial  com- 
munity be  measured  along  the  horizontal  line  AC, 
and  let  the  productivity  of  capital  be  measured  along 
the  perpendicular  line  A^,  and  let  the  descending 
line   EC   represent    the    rate    of    decrease    in   the 


224  The  Distribution  of  Wealth 

marginal  productivity  of  capital.  If  the  amount  of 
capital  were  measured  by  AD,  the  marginal  pro- 
ductivity would  be  measured  by  the  line  BD  or  AK 
If  the  amount  of  capital  were  measured  by  AD\  the 
marginal  productivity  would,  other  things  remaining 
equal,  be  measured  by  the  line  B'D'  or  AF' ;  and 
when  the  amount  of  capital  equalled  AD",  marginal 
productivity  would  equal  B"D'^  or  AP'.  From 
this  it  follows  inevitably  that,  if  capital  went  on  in- 
creasing to  AC,  the  marginal  productivity  of  capital 
would  be  destroyed  altogether.  That  is  to  say,  the 
supply  of  capital  would  have  reached  that  limit  where 
no  more  could  be  used  to  advantage,  and  some  could 
be  spared  without  loss. 

It  begins  to  appear  that  any  explanation  of  the 
problem  of  interest  must  account  for  the  supply  of 
capital  as  well  as  for  its  demand.  The  latter  is 
accounted  for  by  the  law  of  marginal  productiv- 
ity ;  but,  unless  the  supply  is  in  some  way  limited, 
the  marginal  productivity  of  capital  will  disappear. 
What  limits  the  supply  of  capital  ?  It  is  not  limited 
by  nature  beyond  the  power  of  man  to  increase  or 
diminish,  as  is  practically  true  in  the  case  of  land. 
It  is  a  product  of  human  effort  and  can  therefore  be 
increased,  within  pretty  wide  limits,  at  will.  Were 
there  no  sacrifice  connected  with  the  production  of 
capital,  and  with  the  maintenance  and  increase  of  its 


Interest  225 

supply,  would  it  not  increase  indefinitely  until  its 
marginal  productivity  would  be  reduced  to  the 
vanishing  point?  The  income  from  capital  in  the 
shape  of  its  contribution  to  the  product  of  the  com- 
munity is  an  undoubted  advantage.  Were  there  no 
compensating  disadvantage,  men  would  pursue  this 
advantage  by  increasing  the  supply  of  capital  until 
the  advantage  would  disappear.  The  value  or  price 
of  an  ordinary  commodity  is  an  advantage  to  the 
producers  of  it,  but  they  incline  to  pursue  this  ad- 
vantage by  increasing  their  production  until  the 
advantage  is  about  counterbalanced  by  a  disadvan- 
tage in  the  way  of  cost  of  production.  What  is  the 
corresponding  disadvantage  which  checks  the  pro- 
duction of  capital  ? 

This  disadvantage  is  of  two  kinds.  In  the  first 
place,  there  is  the  cost  of  making  the  tools  and 
other  materials  of  which  capital  consists.  Each  tool 
must,  on  the  average,  earn  at  least  enough  during  its 
Ufetime  to  pay  the  cost  of  making  it ;  otherwise 
tools  would  not  be  made.  In  more  general  terms, 
the  marginal  productivity  of  capital  must  be  such 
that  each  and  every  form  will,  on  the  average,  earn 
as  much,  or,  which  means  the  same  thing,  add  as 
much  to  the  product  of  the  community  during  its 
lifetime,  as  it  cost  to  produce  it.  Otherwise  the 
production  of  capital  would  be  checked,  its  supply 

Q 


226 


The  Distribution  of  Wealth 


diminished,  and  its  marginal  productivity  conse- 
quently increased.  Again,  if  this  were  the  only 
disadvantage,  the  supply  of  capital  would  normally 
increase  up  to  that  point  where  its  earnings  or  its 
marginal  productivity  would,  during  its  lifetime,  just 
cover  its  cost. 

This  may  be  illustrated  by  the  following  diagram 
which  is  an  elaboration  of  Diagram  I  on  page  223  of 
the  present  chapter. 


3 

zr=^ 

3' 



-.. 

"-^ 

3" 

---., 

A                                1 

~J                          [ 

y 

r             c 

DIAGRAM   II 


Let  US  suppose,  as  in  the  former  diagram,  that  the 
number  of  implements  of  a  certain  kind,  say  ploughs, 
is  measured  along  the  line  AC^  and  their  marginal 
productivity  along  the  line  AE.  In  this  case,  how- 
ever, we  mean  their  total  marginal  product  during 
their   average    Ufetime,   or    that  amount   which   an 


Interest  227 

average  plough  will  add  to  the  product  of  the  com- 
munity during  its  lifetime,  over  and  above  what 
could  be  produced  without  it.  To  distinguish  this 
from  the  marginal  product  per  year,  we  shall  call  it 
the  total  earnings  of  a  plough.  Letting  the  descend- 
ing curve  represent  the  decline  in  the  total  earnings 
of  each  plough  as  the  number  of  ploughs  increases, 
the  line  DB  or  AF  would  represent  the  total  earn- 
ings of  each  plough  when  their  number  was  repre- 
sented by  the  line  AD.  When  their  number  is  AD\ 
the  total  earnings  of  each  would  be  D'B',  or  AF\ 
and  when  the  number  is  AD"y  the  total  earnings  of 
each  would  be  D"B"  or  AF".  Let  us  further  sup- 
pose that  the  cost  of  making  ploughs  is  represented 
by  the  perpendicular  distance  of  the  various  points 
on  the  ascending  curve  GB'  above  the  base  line  AC, 
as  was  done  in  the  diagram  on  page  37  of  the  chapter 
on  Value.  If  this  cost  were  the  only  check  on  the  pro- 
duction of  ploughs,  there  is  no  reason  why  they  should 
not  increase  to  the  point  D\  where  the  total  earnings 
of  each  plough  would  just  pay  the  cost  of  making 
the  most  expensive  part  of  the  total  supply.  They 
would  sell  at  the  uniform  price  of  D'B'  or  AF\ 
which  would  be  their  normal  equilibrium  price.^  The 
total  earnings  of  a  plough  would  then  just  cover  the 
price  which  the  buyer  would  have  to  give  for  it. 

1  See  Chapter  I,  p.  31. 


228  The  Distribution  of  Wealth 

But  if  a  piece  of  capital  should  earn  during  its 
lifetime  only  enough  to  pay  the  cost  of  making  it,  or 
the  price  which  its  owner  would  have  to  pay  fpr^it, 
there  would  be  no  such  thing  as  interest.  That 
would  only  be  enough  to  replace  it  when  it  was 
worn  out  and  to  keep  the  supply  intact.  The  owner 
who  used  capital  under  such  circumstances  would 
gain  nothing  by  its  use,  and  a  borrower  would  lose 
if  he  paid  back  more  than  the  principal  of  a  general 
fund  borrowed.  As  we  have  already  seen,  interest 
exists  only  when  capital  earns  something  in  addition 
to  that  which  is  necessary  to  replace  it  and  maintain 
its  supply  intact.  It  is  evident  therefore  that  some 
additional  check  must  be  put  upon  the  production 
of  capital  if  it  is  to  yield  any  interest,  for  if  the 
cost  of  making  it  were  the  only  check,  its  supply 
would  normally  increase  until  its  earning  capacity 
would  fall  to  a  level  with  its  cost  of  production. 
But  if,  in  the  former  diagram,  the  supply  of  ploughs 
could  be  checked  at  the  point  D,  so  that  the  earn- 
ings of  each  plough  would  equal  the  line  DB,  each 
plough  would  then  earn  something  for  its  owner 
over  and  above  the  cost  of  making  it,  or  the  price 
which  its  owner  would  have  to  pay  for  it.  What  is 
there  to  further  check  the  production  of  ploughs,  or 
of  other  forms  of  capital,  so  that  they  may  earn  such 
a  surplus } 


Interest  229 

Such  a  check  is  found  in  the  conjunction  of  two 
facts:  first,  the  owner  of  capital  must  wait  for  its 
earnings  to  come  in ;  second,  as_a_rulei_men  do  not 
like  to  wait.  Take  the  case  of  a  blacksmith  who,  by 
his  own  labor,  makes  a  plough  out  of  materials  which 
cost  him  $5.  Let  us  suppose  that  he  can  in  a  fort- 
night make  a  plough  which  will  earn  a  total  of  $^0 
during  its  lifetime  of  ten  years.  Deducting  the  cost 
of  materials,  this  leaves  him  1^25  as  the  net  earnings 
of  his  fortnight's  work;  but  he  must  wait  for  his 
wages,  receiving  them  in  instalments  over  a  period 
of  ten  years.  If  he  does  not  mind  waiting,  this  will 
be  no  drawback  and  he  would  just  as  lief  make  a 
plough  as  to  work  for  the  same  amount  in  cash  or  in 
present  consumable  goods.  Or,  having  made  such  a 
plough,  he  would  not  sell  it  for  less  than  ^^30,  the 
total  amount  which  it  will  be  expected,  one  with 
another,  to  earn  during  its  lifetime. 

But  if  he  does  mind  waiting,  and  would  much  pre- 
fer to  receive  his  wages  at  once,  he  would  not  make 
ploughs  at  all  so  long  as  he  could  earn  $25  per 
fortnight  in  present  consumable  goods.  Or,  having 
made  a  plough  which  will  earn  1^30  in  the  course  of 
its  lifetime,  he  would  be  willing  to  sell  it  for  less  than 
that  amount,  which,  counting  out  the  cost  of  the  raw 
materials,  would  net  him  less  than  $2$  for  his  work. 
If  no  blacksmith  could   be  found  willing  either  to 


230  The  Distribution  of  Wealth 

wait  ten  years  for  his  wages  or  to  accept  less  than 
1^25  for  the  amount  of  work  necessary  to  make  a 
plough,  no  ploughs  with  such  small  earning  capacity 
would  be  made  unless  some  one  else  could  be  found 
who  did  not  mind  waiting  and  who  would  therefore 
be  willing  to  pay  $^0  for  a  plough  and  then  wait  ten 
years  to  get  his  money  back.  But  if  no  such  person 
could  be  found,  the  making  of  ploughs  would  stop 
until  their  growing  scarcity  would  raise  their  margi- 
nal productivity  and  their  total  earnings  somewhat 
above  $^0. 

Though  no  one  would  be  likely  to  want  to  wait  ten 
years  to  get  back  the  same  amount  of  money  which 
he  spent  on  a  plough,  he  might  be  willing  to  wait  for 
that  amount  plus  a  surplus.  That  is,  he  might  be 
willing  to  pay  the  blacksmith  $^0  for  a  plough  which 
would,  in  the  course  of  ten  j^ears,  earn  the  total 
amount  of  $^0.  In  that  case,  he  would  get  back  his 
original  outlay  and  $20  besides.  The  J^20  would  be 
interest.  Under  these  conditions  it  would  be  the 
general  dislike  of  waiting  which  would  so  limit  the 
production  of  ploughs  that  each  one  would,  on 
the  average,  earn  more  during  its  lifetime  than  was 
sufficient  to  pay  the  cost  of  making  it.  But  if  the 
dislike  of  waiting  were  general,  it  would  limit  the 
supply  of  other  kinds  of  capital  as  well  as  that  of 
ploughs,  and  it  would  therefore  be  a  general  cause  of 


Interest  231 

the  existence  of  the  surplus  which  we  have  called 
interest. 

All  income-bearing  goods  are,  as  we  have  seen 
already,  alike  in  that  they  are  not  wanted  for  their 
own  sakes,  but  for  the  sake  of  the  incomes  which 
they  will  earn.  Incomes  consist,  in  last  analysis,  of 
consumers'  goods,^  and  these  goods  are  the  sole 
reason  for  desiring  the  possession  of  income-bearing 
goods.  But  all  forms  of  capital  are  alike  in  that 
their  cost  of  production  must  have  been  borne  by 
some  one  before  they  begin  to  return  their  incomes. 
The  maker  of  a  piece  of  capital  must  himself  wait 
for  the  income  to  mature,  or  he  must  sell  it  to  some 
one  else,  in  which  case  it  is  the  buyer  who  waits. 
His  waiting  consists  in  giving  up  the  opportunity  of 
buying  present  consumers'  goods,  and  receiving  in 
return  the  means  of  securing  consumers'  goods  at 
some  time  in  the  future.  It  is  virtually  an  exchange 
of  present  consumers'  goods  for  future  consumers* 
goods.  While  technically  he  receives  present  income- 
bearing  goods,  yet  since  he  does  not  want  them 
except  for  the  sake  of  the  want-satisfying  consumers^' 
goods  which  they  will  bring  him,  he  really  exchanges 
for  the  latter  goods.  It  is  the  same  whether  he  lends 
money,  or  invests  in  machinery,  or  deposits  in  a  sav- 
ings bank.     They  are  all  forms  of   waiting,   or   of 

1  Cf.  Taussig,  "  Wages  and  Capital,"  Chapter  II. 


232  The  Distribution  of  Wealth 

saving  as  it  is  sometimes  called.  The  man  who  buys 
a  plough  to  use  on  his  farm  is  saving  as  truly  as  the 
man  who  deposits  a  like  sum  in  a  bank  or  hides  it  in 
his  stocking.  Waiting  or  saving  is  quite  as  essen- 
tial to  the  existence  of  capital  as  labor  itself,  for  if 
there  were  no  saving  there  would  be  no  capital.  Since 
men  as  a  rule  do  not  like  to  wait  any  better  than 
they  like  to  work,  it  is  quite  as  essential  that  waiting 
be  paid  for  as  it  is  that  work  be  paid  for. 

But  it  must  not  be  inferred  that  all  saving  involves 
sacrifice.  There  would  be  some  saving  were  there 
no  interest  at  all,  —  that  is,  if  capital  did  not  earn  any 
more  than  enough  to  replace  itself.  It  is  even  proba- 
ble that  a  considerable  amount  would  be  saved  if, 
instead  of  savings  affording  a  surplus,  men  were 
obliged  to  pay  rent  for  vaults  in  which  to  store  them 
or  even  to  hire  others  to  take  their  surplus  wealth 
and  use  it  for  them.  In  so  far  as  it  is  true  that  men 
estimate  present  higher  than  future  consumption,  it 
only  applies  to  the  consumption  of  corresponding 
increments  of  income.  A  man  with  an  income  of 
$io,CKX)  a  year  derives  less  utility  from  the  consump- 
tion of  the  last  than  from  the  first  thousand.  He 
may  receive  so  small  an  amount  of  pleasure  from  the 
consumption  of  the  last  thousand  dollars  that  he  will 
prefer  to  save  it  for  the  purpose  of  satisfying  a  more 
pressing  want  in  the  future.     It  is  upon  this  princi- 


Interest 


233 


pie  that  men  lay  up  for  a  rainy  day  or  for  old  age. 
This  may  be  illustrated  by  Diagram  III  below. 

In  Figures  I  and  II  of  that  diagram,  let  the 
amount  of  a  man's  income  be  measured  along  the 
horizontal  lines  AB  and  A^B\  Let  the  utility  of 
different  increments  be  represented  by  the  perpen- 
dicular lines,  those  in  Figure  I  representing  the 
present  utility  of  present  increments  of  goods,  while 
those  in  Figure  II  represent  the  estimate  which  we 


Figure  I 


Figure  II 


B         A' 
DIAGRAM   III 


now  put  upon  the  utility  of  the  same  or  equivalent 
increments  of  goods  a  year  hence.  In  other  words, 
we  discount  the  future  at  a  rate  corresponding  to  the 
ratio  between  the  perpendicular  lines  in  Figure  I 
and  the  corresponding  lines  in  Figure  II.  It  is 
evident,  then,  from  the  diagram,  that  increment  No. 
10  would  be  saved,  in  order  that  it. might  be  applied 
to  the  satisfaction  of  want  No.  i  in  the  future.  Simi- 
larly, No.  9  of  the  present  would  be  saved  because 
No.  2  of  the  future  is  higher.     The  same  may  be 


234  The  Distribution  of  Wealth 

said  of  No.  8  of  the  present,  because  it  does  not  quite 
come  up  to  No.  3  of  the  future.  But  here  saving 
would  stop ;  for  there  would  be  a  loss  in  abstaining 
from  the  consumption  of  No.  7,  in  order  to  apply  it 
to  No.  4  in  the  future. 

This  diagram,  it  will  be  understood,  only  illustrates 
a  certain  social  tendency.  In  a  less  advanced  stage 
of  society  than  that  to  which  we  are  accustomed,  the 
difference  between  the  estimations  of  present  and 
future  would  be  greater  than  under  present  condi- 
tions. Even  in  present  society  there  are  those  to 
whom  the  future  seems  to  offer  small  inducement 
for  present  frugality.  On  the  other  hand,  there  are 
those  in  whom  the  instinct  of  saving  is  so  strong  that 
they  seem  to  begrudge  themselves  present  satisfac- 
tion, —  and  that,  too,  without  much  thought  of  future 
consumption,  but  simply  to  gratify  their  desire  for 
accumulation.  But  the  normal  tendency  is  probably 
illustrated  by  the  man  who  looks  forward  to  the  time 
when  he  will  have  greater  wants  to  supply  on  ac- 
count of  a  growing  family,  or  the  hope  of  some  time 
having  a  growing  family  to  provide  for,  and  who  also 
looks  forward  to  the  time  when  age  will  begin  to  tell 
upon  his  powers,  and  the  same  income  will  have  a 
larger  marginal  utility,  owing  to  the  increased  pain 
of  producing  it.  Neither  in  the  case  of  this  man, 
nor  in  that  of  the  miser,  is  there  any  true  sacrifice 


Interest  235 

connected  with  saving.  His  capital  costs  him  noth- 
ing except  the  original  outlay  to  pay  the  cost  of  pro- 
duction. Were  there  no  other  way  of  saving,  such 
a  man  would  buy  a  plough  and  pay  for  it  all  that  it 
would  ever  earn  for  him,  in  which  case  he  would 
only  get  his   principal  back,  and  no  interest  at  all. 

If  only  so  much  were  needed  to  carry  on  industry 
as  could  be  saved  without  any  sacrifice,  —  that  is,  if  so 
much  were  sufficient  to  bring  down  the  marginal  pro- 
ductivity to  the  point  where  it  would  just  pay  the 
cost  of  making  it,  there  would  be  no  interest  any- 
where. But,  if  more  is  needed,  —  that  is,  if  more  can 
be  used  and  still  afford  a  surplus  at  the  margin,  it  must 
be  paid  for,  because  to  save  it  requires  sacrifice  from 
somebody.  Returning  to  our  illustration,  if  incre- 
ment No.  7  is  required,  it  will  be  saved  at  a  loss, 
because  its  present  utility  stands  higher  than  our 
present  estimate  of  the  utility  of  No.  4  in  the  future. 

In  this  connection  appears  a  possible  correction  to 
Bohm-Bawerk's  theory,  according  to  which  interest 
must  equal  the  amount  by  which  men  discount  the 
future,  or  the  difference  between  the  value  of  pres- 
ent and  of  future  goods.  The  statement  that  "  pres- 
ent goods  are,  as  a  rule^  worth  more  than  future 
goods  of  like  kind  and  number,"  ^  would  carry  with 
it  the  statement  that  a  dollar  now  is  worth  more  in 

1  "  Positive  Theory  of  Capital "  [Smart's  translation],  p.  237. 


236  The  Distribution  of  Wealth 

present  estimation  than  a  dollar  a  year  hence.  If 
we  elimate  the  element  of  risk,  as  he  expressly  states 
that  we  must  do,  it  can  scarcely  be  said  to  be  true 
that,  as  a  rule,  a.  dollar  is  worth  more  to-day  than  a 
year  hence. 

Of  the  wealth  in  the  possession  of  society  to-day 
it  is  altogether  probable  that  the  greater  part  would 
be  saved  for  more  than  a  year,  even  if  there  were 
no  surplus  to  be  secured  by  so  doing,  — >  that  is,  if  men 
knew  that  they  would  only  get  their  principal  back. 
In  other  words,  so  far  as  concrete  goods  are  con- 
cerned, their  future  value  is  sometimes  greater  than 
their  present,  because  they  are  expected  to  supply  a 
more  pressing  want  in  the  future  than  it  is  possible 
to  apply  them  to  in  the  present.  In  such  cases  there 
is  a  high  reward  for  saving  in  the  anticipated  future 
increase  in  their  want-satisfying  power.  This  class 
of  goods  may  be  called  the  first  increment;  of  capital 
saved.  It  is  that  portion  which  would  be  saved  even 
if  its  owners  should  be  compelled  to  hire  vaults  in 
which  to  store  it.  The  second  increment  may  have 
a  lower  anticipated  future  increase  of  want-satisfying 
power  than  the  first ;  but  its  future  utility  may  still 
be  estimated  just  as  highly  as  its  present  utility, 
while  the  saving  of  the  third  involves  a  positive  sac- 
rifice, because  its  future  want-satisfying  power  is 
estimated  as  lower  than  its  present,  and  that  of  the 


Interest 


237 


fourth  still  lower.  In  this  case  the  decrease  of  sub- 
jective utility  must  be  compensated  for  by  a  surplus. 
It  is  not  the  difference  in  the  general  estimation  of 
present  and  future  goods  which  fixes  the  rate  of  in- 
terest, but  only  the  difference  in  the  estimation  of 
the  present  and  future  value  of  the  last  increment  of 
goods  saved. 

If  in  Diagram 
IV  we  let  the 
angle  of  descent 
of  the  line  AC" 
represent  the 
rate  at  which,  ac- 
cording to  Bohm- 
Bawerk,  men 
discount  the  fu- 
ture, and  let  the 
line  AB  represent 
the  present  value 
of   a  commodity, 

the  line  CB'  would  represent  the  present  value  of 
the  means  of  securing  it  a  year  hence,  CB"  the 
present  value  of  the  means  of  securing  it  two  years 
hence,  and  so  on.  According  to  this  theory,  one 
year's  interest  ought  to  equal  the  dotted  line  A'C, 
two  years'  interest  the  dotted  line  A'C,  and  so  on. 

In  the  first  place,  as  suggested  above,  it  is  not 


B'      B"      B'" 
DIAGRAM  IV 


238  The  Distribution  of  Wealth 

correct  to  speak  of  a  general  discounting  of  the 
future  use  of  commodities,  or  concrete  goods.  In  a 
great  many  cases  the  future  use  of  a  commodity  is 
estimated  higher  than  its  present  use,  because  pres- 
ent wants  are  so  well  supplied  that  the  marginal 
utility  of  present  consumption  is  very  low.  Sup- 
pose, for  example,  that  you  have  ;^ioo  in  your 
pocket.  You  can  spend  it  all  to-day  on  your  din- 
ner; and  you  might,  could  you  forget  the  future, 
get  some  satisfaction  out  of  the  consumption  of 
the  last  dollar.  But  you  do  not  forget  the  future ; 
and  the  amount  of  pleasure  which  you  could  get 
out  of  the  expenditure  of  the  last  ninety-nine  dollars 
is  so  small  that  you  prefer  to  save  it,  in  order  that 
you  may  enjoy  a  series  of  ordinary  dinners  in  the 
future.  You  would  save  it  were  there  no  interest 
to  be  had.  In  fact,  if  you  could  not  keep  it  your- 
self, you  would  hire  some  one  to  keep  it  for  you 
rather  than  consume  it  now.  Yet,  if  you  choose  to 
lend  it,  you  can  get  just  as  much  interest  for  it  as 
though  it  had  cost  you  a  heavy  sacrifice  to  abstain 
from  consuming  it. 

Nevertheless,  you  doubtless  have  a  more  vivid 
appreciation  of  present  than  of  future  wants. 
There  is  a  point  at  which  you  will  stop  saving, 
because  you  do  not  expect  ever  to  be  in  a  position 
when  an  ordinary  dinner  will  be  worth  more  to  you 


Interest  239 

than  it  is  now.  You  will  probably  not  forego  the 
pleasure  of  a  fifty-cent  dinner  and  content  yourself 
with  a  fifteen-cent  lunch,  in  order  to  be  better  pro- 
vided in  the  future,  because  you  never  expect  to  be 
in  a  position  when  you  cannot  afford  a  fifty-cent 
dinner.  Were  you  a  spendthrift,  you  would  prob- 
ably not  hesitate  to  spend  several  dollars  on  expen- 
sive delicacies  and  fine  cigars  for  the  same  reason. 
The  spendthrift's  appreciation  of  the  future  is  very 
low.  Your  case  may  be  taken  as  typical  of  society 
as  a  whole.  There  is  a  certain  point  where,  were 
there  no  interest  or  profits  from  the  use  of  capital, 
saving  would  cease.  That  point  would  be  where 
men  balanced  present  against  future  consumption; 
in  other  words,  where  the  want-satisfying  power  of 
present  and  of  future  goods  is  equal  in  present 
estimation.  But  if  the  use  and  employment  of 
capital  is  productive,  and  the  amount  of  capital  in 
existence  under  these  conditions  were  not  enough  to 
bring  its  marginal  productivity  down  to  the  point 
where  it  would  just  pay  the  cost  of  making  it,  there 
would  be  a  demand  for  more  capital.  In  order  to 
get  it,  interest  in  the  form  of  a  surplus  would  have 
to  be  paid  to  induce  men  to  save  more.  Conse- 
quently, interest  does  not  correspond  to  any  general 
discounting  of  future  consumption  of  commodities, 
but  only  to   the    marginal  discount  or  to  the  mar- 


240  The  Distribution  of  Wealth 

ginal  sacrifice  of  saving.  It  must  be  sufficient  to 
compensate  the  capitalist  for  saving  the  last  incre- 
ment of  capital. 

This  also  may  be  illustrated  by  Diagram  IV,  page 
237.  Of  the  first  increment  of  goods  saved,  let  the 
present  value  be  represented  by  the  line  AB.  The 
present  estimate  of  its  value  a  year  hence  by  GB^,  two 
years  hence  by  G'B'\  etc.  Of  the  second  increment, 
the  present  value  is  AB.  The  present  estimate  of 
its  value  a  year  hence  is  represented  by  A^B^j  two 
years  hence  by  A"B'\  etc.  Of  the  third  increment 
saved,  the  present  value  is  represented  by  AB^  the 
present  estimate  of  its  value  a  year  hence  by  FB\ 
two  years  hence  by  FB'\  etc.  Were  this  the  last  in- 
crement saved,  one  year's  interest  for  all  increments 
would  correspond  to  A^F,  two  years*  interest  to 
A'^Pf  etc.  But  the  fourth  increment  has  a  present 
value  corresponding  to  AB,  and  an  estimated  value 
one  year  hence  corresponding  to  CB',  two  years 
hence  corresponding  to  C'B",  etc.  Since  this  is  the 
last  increment  saved,  one  year's  interest  throughout 
the  field  would  correspond  to  A'C,  two  years'  interest 
to  A'^Cy  etc.  The  loss  in  the  subjective  valuation 
of  this  last  increment  must  be  compensated  for  by  a 
surplus  in  the  form  of  interest.  But  if  some  capital 
yields  such  a  surplus  over  and  above  the  cost  of 
making  it,  all  must  do  the  same.     If  one  plough  which 


Interest  241 

will  yield  1^50  in  its  lifetime,  must  be  sold  for  1^30  to 
the  marginal  buyer,  other  ploughs  of  the  same  kind 
must  sell  at  the  same  price,  yielding  a  uniform  sur- 
plus of  ;^20  a  piece.  And  other  forms  of  capital 
would  have  to  yield,  barring  risk,  the  same  surplus 
in  the  same  time,  else  all  capitaHsts  would  be  buying 
those  which  yield  the  largest. 

If,  however,  it  is  intended  to  apply  Bohm-Bawerk's 
theory  to  the  difference  with  which  we  estimate  pres- 
ent and  future  wants  (as  illustrated  in  Figures  I  and  II 
of  Diagram  III,  page  233),  it  is  again  found  to  be 
faulty.  Men  seldom  abstain  from  the  satisfaction  of 
a  want  in  order  to  be  able  at  some  future  time  to 
supply  the  same  or  a  corresponding  want. 

In  the  case  of  those  wants  which  we  leave  unsatis- 
fied for  the  express  purpose  of  getting  interest,  the 
interest  does  not  pay  for  the  difference  with  which 
we  estimate  the  present  and  future  satisfaction  of 
the  particular  want  which  is  forestalled.  Let  us 
return  to  Diagram  III.  If  increment  No.  7  were 
saved,  the  sacrifice  would  not  correspond  to  the 
difference  between  No.  7  of  Figure  I  and  No,  7  of 
Figure  II,  but  to  the  difference  between  No.  7  of 
Figure  I  and  No.  4  of  Figure  II.  If  in  Diagram  IV 
we  let  the  descending  line  AC"^  represent  the  rate  at 
which  we  discount  future  wants,  the  rate  of  interest 
would  correspond  to  those  portions  of   the  perpen- 


4 

242  The  Distribution  of  Wealth 

dicular  lines  which  lie  above  some  such  descending 
line  as  AF'"  rather  than  to  those  portions  which  lie 
above  AC". 

As  already  stated,  a  considerable  portion  of  the 
capital  has  involved  no  sacrifice  in  the  act  of  saving. 
Were  this  supply  sufficient  to  bring  the  marginal 
utility  down  to  where  it  would  just  balance  whatever 
risk  the  capitalist  undergoes  in  lending  or  employing 
his  capital,  plus,  of  course,  the  cost  of  making  it,  no 
true  interest  would  be  paid.  A  larger  amount  of 
saving  would  cut  into  more  pressing  wants,  and  in- 
volve a  sacrifice.  Men  will  not  undergo  this  sacrifice 
unless  they  are  paid  for  it.  This  gives  rise  to  interest, 
which  then  becomes  an  element  in  the  cost  of  capital 
in  addition  to  the  cost  of  producing  it. 

The  relation  of  abstinence  to  interest  may  be 
further  illustrated  by  means  of  the  following  diagram, 
which  is  an  elaboration  of  Diagram  II  on  page  226 
of  the  present  chapter.  In  this  case,  as  in  the  for- 
mer, let  us  assume  that  the  amount  of  a  certain  kind 
of  capital  is  measured  along  the  line  AC,  and  its 
marginal  productivity  along  the  Hne  AE,  the  de- 
scending curve  EC  representing  the  decline  in  the 
marginal  productivity  as  the  supply  increases.  If 
there  were  nothing  to  check  its  production  but  the 
cost  of  producing  it,  the  supply  would  normally 
increase  to  the   point  D',  as  shown  in  the  former 


Interest 


243 


diagram,  at  which  point  the  marginal  product  would 
just  cover  the  marginal  cost,  and  there  would  be 
no  interest.  This  point  is  located  by  the  intersec- 
tion of  the  cost  curve  GB^  with  the  productivity 
curve  EC.  But  in  addition  to  the  cost  of  produc- 
tion there  is  the  disadvantage  or  sacrifice  of  waiting. 
The  effect  of  this  is  illustrated  by  the  rising  curve 


3 

INTEREST        / 

\ 

f 

,<- — ' 

COST  OF  PRODUCTION 

^"-. 

A                           K                         I 

D           1 

y 

•c 

F' 
G 


DIAGRAM    V 


HB.  This  curve  repre«ents,  by  its  distance  above 
or  below  the  cost  curve  GB,  the  positive  or  negative 
sacrifice  of  saving  the  different  parts  of  the  supply 
of  capital.  Where  this  curve  is  below  the  cost 
curve,  it  means  that  there  is  an  advantage  rather 
than  a  disadvantage  connected  with  the  exchange 
of  present  for  future  goods  which  saving  implies. 
Where  this   curve   coincides   with   the    cost    curve. 


244  The  Distribution  of  Wealth 

there  is  neither  advantage  nor  disadvantage  con- 
nected with  saving,  but  when  it  rises  above  the  cost 
curve  there  is  a  disadvantage  connected  with  saving 
which  becomes  a  check  upon  the  production  of 
capital  in  addition  to  that  effected  by  the  cost  of 
producing  it 

If  the  production  of  capital  should  stop  at  the 
point  K  where,  as  shown  by  the  intersection  of 
the  abstinence  curve  HB  with  the  cost  curve  GB\ 
there  is  neither  advantage  nor  disadvantage  con- 
nected with  saving,  its  marginal  productivity  would 
be  represented  by  the  line  KL.  This  would  give 
its  owner  an  advantage  far  in  excess  of  any  disad- 
vantage connected  with  its  production,  and  this 
would  stimulate  its  further  production.  But  in  order 
to  increase  its  production,  it  would  be  necessary  to 
do  more  waiting  as  well  as  more  work.  From  this 
point  on,  further  waiting  begins  to  be  burdensome, 
acting  as  a  positive  check  upon  production.  The 
normal  tendency  would  be  for  capital  to  increase  up 
to  the  point  A  at  which  point  the  combined  dis- 
advantage of  working  and  waiting,  or  of  cost  of 
production  and  abstinence,  would  be  just  compen- 
sated by  the  marginal  productivity  of  that  kind  of 
capital.  At  this  point  the  marginal  productivity 
would  be  represented  by  the  line  DB^  the  marginal 
cost  of  production  by  the  line  DT,  and  the  marginal 


Interest  245 

abstinence  by  the  line  IB.  The  total  present  value 
of  that  kind  of  capital  would  then  be  represented  by 
the  parallelogram  ADF'I.  The  total  product  of  the 
present  supply  of  capital  during  its  lifetime  would 
be  represented  by  the  parallelogram  ADFB^  and  the 
total  surplus  or  interest  by  the  parallelogram  F'IFB. 
The  same  result  is  reached  by  approaching  the 
subject  from  the  side  of  demand,  and  regarding  the 
disadvantage  of  waiting  as  reducing  the  purchaser's 
demand^  for  capital  instead  of  checking  its  supply. 
It  is,  generally  speaking,  the  amount  which  pur- 
chasers will  pay  for  it  which  constitutes  the  reward 
of  the  makers  of  capital  and  serves  as  an  induce- 
ment to  continue  the  work  of  production.  So  long 
as  the  purchaser's  demand  will  give  ploughs,  for  ex- 
ample, a  price  equal  to  the  cost  of  producing  them, 
the  producers  will  continue  their  work.  As  already 
pointed  out,  if  there  were  no  disadvantage  connected 
with  saving,  men  might  be  expected  to  pay  as  much 
in  cash  for  a  piece  of  capital  as  they  expect  it  to 
return  them  in  the  way  of  income  during  its  lifetime. 
In  that  case  the  purchaser's  demand  curve  for 
capital  would  coincide  with  the  productivity  curve 
of  the  foregoing  diagram.  There  would  then  be  an 
equilibrium  of  supply  and  demand  at  the  point  where 
the    demand-productivity   curve   EC   intersects    the 

^  As  distinguished  from  the  borrower's  demand. 


246 


The  Distribution  of  Wealth 


cost  curve  GB\  But  since  there  is  a  certain  dis- 
advantage connected  with  saving,  and  men  are  not 
always  willing — not  even  those  who  inveigh  against 
interest  on  capital  —  to  pay  as  much  in  cash,  or  pres- 
ent consumable  goods,  for  a  piece  of  capital  as  it  will 
produce  during  its  lifetime,  the  purchaser's  demand 


H 

E 

F 
F 

3 

1                       N 

INTEREST     1               \ 

:>f. 

j 

G 

TOTAL  PRESENT 
VALUE  OF  CAPITAL 

1 

1 
1 

»•.. 

/ 

\                             K               I 

DM                             C 

DIAGRAM   VI 

curve  does  not  coincide  with  the  productivity  curve, 
and  the  equilibrium  of  demand  and  supply  is  reached 
at  some  other  point. 

This  way  of  approaching  the  problem  may  be 
illustrated  by  means  of  the  above  diagram,  which 
is  a  modification  of  Diagram  V.  The  purchaser's 
demand  for  capital  is,  in  this  case,  represented  by 


Interest  247 

the  descending  curve  HM,  which  bears  the  same 
relation  to  the  productivity  curve  EC  which  the 
abstinence  curve  HB  bore  to  the  cost  curve  GB  in 
the  last  diagram.  Where  this  demand  curve  is 
above  the  productivity  curve,  it  means  that  men  are 
so  anxious  to  provide  against  the  uncertainties  of 
the  future  that  they  will  give  a  larger  number  of 
present  goods  for  the  sake  of  having  a  smaller  num- 
ber at  some  time  in  the  future,  or  that  men  of  enor- 
mously large  incomes  would  have  so  much  trouble 
trying  to  consume  them  all  that  they  would  rather 
invest  a  part  in  some  enterprise  for  the  sport  of 
carrying  it  through,  even  though  they  may  never  get 
all  their  money  back,  while  men  of  moderate  in- 
comes would  rather  provide  against  a  rainy  day  than 
to  consume  all  their  incomes,  even  though  their  sav- 
ings shrunk  in  the  interval.  Yet  if  the  enterprises 
return  a  surplus,  and  the  savings  expand,  both 
classes  of  savers  will  take  advantage  of  the  pos- 
sibility of  getting  an  increase.  Where  the  demand 
curve  coincides  with  the  productivity  curve,  it  means 
that  there  is  neither  advantage  nor  disadvantage 
connected  with  saving ;  and  where  the  demand  curve 
falls  below  the  productivity  curve,  it  means  that  there 
is  a  disadvantage  connected  with  saving,  and  there- 
fore less  will  be  paid  for  a  piece  of  capital  than  it 
will  earn  in  the  future. 


^48  The  Distribution  of  Wealth 

Under  these  conditions  the  equilibrium  of  demand 
and  supply,  which  determines  the  present  selling 
value  of  capital,  would  be  reached  when  the  supply 
of  capital  was  represented  by  the  line  ADy  for  this 
would  be  the  point  where  the  purchaser's  demand 
for  the  different  forms  of  capital  would  give  them  a 
value  just  equal  to  their  marginal  cost  of  production. 
Yet  the  marginal  productivity  of  that  amount  of 
capital  would  be  represented  by  the  line  DB ;  the 
present  selling  value  of  capital,  which  is  equivalent 
to  the  present  value  of  its  future  product,  would  be 
represented  by  the  line  I?/;  and  the  surplus  which 
would  come  to  the  buyer  who  took  it  at  its  present 
selling  value  and  waited  for  its  earnings  to  mature 
would  be  represented  by  the  line  IB.  The  total 
present  value  of  all  now  existing  capital  would  be 
represented  by  the  parallelogram  ABF'I;  its  total 
future  earnings,  computed  on  the  basis  of  its  margi- 
nal productivity,  by  the  parallelogram  ADFBy  and 
total  interest  or  surplus  which  would  come  to  those 
who  buy  the  capital  at  its  present  value  and  wait  for 
its  product  to  mature  would  be  represented  by  the 
parallelogram  F'IFB.  The  annual  interest  would 
have  to  be  computed  by  dividing  this  gross  amount 
by  the  average  lifetime  of  the  now  existing  capital. 
This  would  give  the  lump  sum  going  as  interest  to 
the  owners  of  capital  each  year.     The  annual  rate  of 


/     ^     OF   THE 

ji   UNIVERSITY 

■"'^  Interest  249 

interest  would  have  to  be  computed  by  finding  what 
percentage  the  annual  interest  is  of  the  total  present 
value  of  the  capital. 

Land  seems  to  yield  interest  in  the  same  way, 
especially  when  looked  at  from  the  standpoint  of 
the  individual  buyer.  The  demand  for  land,  like  the 
demand  for  capital,  is  limited  by  the  fact  that  the 
buyer  must  wait  for  his  returns  through  a  series  of 
years.  Consequently,  no  one  will  pay  a  price  for  it 
which  will  at  all  approximate  the  total  amount  of  its 
future  earnings.  Since  land,  irrespective  of  improve- 
ments, is  practically  indestructible,  the  sum  total  of 
its  future  earnings  is  practically  unlimited.  But  in 
order  to  realize  such  a  return  it  would  be  necessary 
to  wait  for  a  longer  period  of  time  than  the  ordinary 
mortal  cares  even  to  take  into  consideration.  A  sum 
equal  to  its  net  earnings  for  a  period  of  thirty  years 
is  considered  a  good  price  for  land,  even  in  the  most 
thrifty  communities.  All  that  it  earns  in  excess  of 
that  amount  may  therefore  be  considered  as  the  inter- 
est on  the  investment.  But  after  such  a  piece  of 
land  has  been  in  the  same  family  for  a  few  genera- 
tions, all  its  earnings  may  be  considered  as  a  surplus, 
since  the  original  investment  would  have  been 
wiped  out. 

i    The^^^^^f^apital,  as  we  have  seen,  must^ always 
deduct  a  certain  part  of  its  earnings  for  the  purpose 


250  The  Distribution  of  Wealth 

ofjeplacing  it,  and  only  thp  surplus  is  interest ;  but 
there  is  an  indestructible  element  in  land  which  does 
not  have  to  be  replaced  because  it  never  wears  out. 
Looked  at  broadly,  all  the  income  from  this  inde- 
structible element  is  surplus.  He  who  first  appropri- 
ated it  got  it  for  nothing.  If  it  ever  returns  him  an 
income  (and  it  does  not  always,  some  land  owing  its 
whole  value  to  its  improvements  and  artificial  fertili- 
zation), that  income  is  not  reduced  by  the  necessity 
of  getting  back  the  original  cost.  Even  the  buyer 
who  pays  a  price  for  it  is  under  no  necessity  of 
deducting  anything  from  its  earnings  in  order  to 
replace  it  or  to  prevent  its  deterioration.  The  origi- 
nal price  which  he  paid  for  it  may  be  regarded  as 
being  maintained  in  the  land  itself.  To  be  sure,  even 
this  indestructible  element  in  the  land  may  decUne  in 
value  because  of  general  social  changes ;  but  such  a 
decline,  like  a  rise  in  value  for  similar  reasons,  is  in- 
dependent of  any  labor  or  expense  which  the  owner 
himself  bears  or  shirks ;  it  is  not  to  be  attributed  to 
his  failure  to  keep  up  repairs.  Since,  in  the  modern 
world,  the  chances  of  a  rise  in  value  are  rather  better 
than  the  chances  of  a  fall,  we  are  well  within  the 
bounds  of  safety  when  we  say  that  the  average  piece 
of  land  maintains  the  purchase  price  of  the  indestruc- 
tible element  in  it  without  expense  to  the  buyer.  He 
can  keep  it  for  a  period  of  years  and  then  sell  it  for 


Interest  251 

the  former  price,  meanwhile  having  received  an  in- 
come from  it.  In  such  a  case,  the  whole  of  the 
income  is  a  surplus.  But  since  there  is  no  such  inde- 
structible element  in  any  form  of  capital,  the  whole 
of  the  earnings  of  capital  is  never  a  surplus.  There- 
fore, though  the  rent  of  land  resembles  interest  in 
certain  points,  the  differences  are  sufficient,  especially 
when  we  consider  city  land,  whose  value  lies  pri- 
marily in  its  indestructible  elements  of(space,  support, 
and  location)  to  warrant  our  treatment  of  rent  in  a 
class  by  itself. 

Different  forms  of  capital  differ  greatly  as  to  the 
length  of  time  they  will  last.  Some,  like  the  coal  in 
the  furnace  or  the  ice  in  the  refrigerator,  last  only  a 
few  minutes  or  hours  at  most ;  others,  such  as  build- 
ings and  drainage  systems,  last  so  long  as  to  almost 
resemble  land  in  point  of  durability.  But  they  are 
all  alike  in  being  perishable  sooner  or  later,  and  in 
having  to  produce  enough  in  their  lifetime,  however 
brief,  to  more  than  replace  themselves  if  their  owners 
are  to  derive  any  income  from  them.  The  ton  of 
coal,  during  the  brief  period  when  it  is  burning  under 
the  boiler,  must  add  enough  to  the  product  of  the 
community  to  buy  another  ton  of  coal  and  leave 
something  over,  or  else  its  destruction  does  not  pay. 
The  product  of  a  piece  of  capital,  however  evanescent 
its  form,  is  determined  by  the  principle  of  marginal 


^5^  The  Distribution  of  Wealth 

productivity,  though  in  explaining  that  principle  the 
illustrations  were  all  drawn  from  the  more  durable 
forms  of  capital.  That  is,  the  more  tons  of  coal  there 
are  to  be  used  in  any  community  in  comparison  with 
all  the  other  factors,  the  less  each  one  will  be  able  to 
add,  during  its  brief  lifetime,  to  the  total  product  of 
the  community.  This  applies  also  to  such  fugitive 
forms  of  capital  as  materials  of  production  which  are 
entering  the  factories  or  stores  on  one  day  as  raw 
materials,  and  seeking  customers  as  finished  products 
the  next.  Each  one  is  a  means  of  adding  something 
to  the  net  income  of  its  temporary  owner  during  that 
more  or  less  brief  period  when  it  is  in  the  position  of 
raw  or  partly  finished  goods, —  in  other  words,  while  it 
is  still  capital.  Each  one  is  normally  expected  to  sell 
for  a  price  which  will  cover  its  original  cost,  or  re- 
place it  with  another  one  like  it,  besides  the  cost  of 
working  on  it,  and  in  addition  something  extra  for 
the  waiting  which  must  transpire  between  the  time  of 
its  purchase  as  raw  material  and  its  sale  as  finished 
product. 

All  forms  of  capital,  however  durable  or  evanes- 
cent, are  alike  also  in  the  particular  that  they  require 
waiting  during  a  longer  or  shorter  period.  The  coal 
which  is  quickly  consumed  had  to  be  produced  first, 
and  some  one  must  carry  that  cost  of  production. 
It  may  be  the  miner  who  mines  it,  the  mine  operator 


Interest  253 

who  pays  the  miner  his  wages,  or  the  manufacturer 
who  buys  it  of  the  mine  operator,  or  it  may  be  all 
three  together;  but  usually  the  manufacturer  who 
uses  the  coal  will  have  paid  for  a  supply  in  advance 
of  its  actual  consumption,  in  which  case  he  will  have 
to  wait  for  its  product.  Between  the  waiting  for 
the  product  of  the  coal  and  that  of  the  building  in 
which  it  is  used  there  is  only  a  difference  of  degree. 
As  the  building  is  expected  normally  to  earn  enough 
during  its  lifetime  of  a  hundred  years  to  pay  for 
another  building,  besides  a  surplus  fund  to  compen- 
sate for  waiting,  so  the  coal  is  normally  expected  to 
earn  enough  during  its  shorter  lifetime  to  pay  for  an 
equal  amount  of  coal,  besides  a  small  surplus  to 
compensate  for  a  short  waiting  period.  But  if  we 
consider  a  series  of  tons  of  coal,  there  may  be  a 
considerable  amount  of  waiting  in  the  aggregate. 
However,  that  part  of  the  manufacturer's  capital 
which  consists  of  coal  amounts  only  to  the  quantity 
on  hand  at  any  one  time.  If  we  may  assume  that 
he  burns  only  one  ton  a  day  for  three  hundred  days 
in  the  year,  and  that  he  buys  each  day's  supply  only 
one  day  ahead,  his  total  capital  in  the  form  of  coal 
does  not  equal  three  hundred  tons,  but  one  ton.  If, 
at  the  end  of  the  year,  each  ton  has  earned  enough 
on  the  average  to  replace  itself  and  a  fraction  over, 
so  that  he  finds  himself  at  the  end  of  the  year  with 


254  The  Distribution  of  Wealth 

one  ton  on  hand,  as  he  had  in  the  beginning,  with 
ten  per  cent  of  the  value  of  one  ton  of  coal  in  addi- 
tion, he  may  consider  that  his  capital  has  earned 
ten  per  cent  interest.  And  all  that  has  been  said 
of  coal  is  true  also  of  any  other  form  of  capital. 

It  is  hardly  necessary  to  state  that  anything  which 
[increases  the  spirit  of  thrift,  frugality,  and  foresight, 
will  reduce  the  marginal  sacrifice  of  abstinence,  and 
correspondingly  increase  the  supply  of  capital  and_ 
reduce  the  rate  of  interest.  It  is  even  conceivable 
that  the  desire  to  save  and  provide  for  the  future 
might  increase  to  such  an  extent  as  to  eliminate 
interest  altogether.  This  could  happen  if  capital 
should  increase  to  that  point  where  its  marginal 
productivity  would  just  equal  its  marginal  cost  of 
production.  If  people  were  so  anxious  to  save  and 
provide  for  the  future  as  to  offer  such  prices  for 
the  different  forms  of  capital  that  their  total  earn- 
ings would  just  cover  the  price  paid,  there  would 
be  no  interest.  This  could  take  place  without  their 
ceasing  to  discount  the  future  in  the  sense  in  which 
Bohm-Bawerk  uses  that  expression.  Referring  again 
to  Diagram  III  on  page  233  of  the  present  chapter, 
if  the  difference  between  our  present  appreciation 
of  our  present  and  our  future  wants  should  grow  so 
small  that  each  one  would  save  the  last  five  sections 
of  his  income  instead  of   the  last  three,  as  repre- 


K 


Interest  255 

sented  in  the  diagram,  it  would  greatly  increase  the 
amount  that  would  be  saved  without  the  necessity 
of  interest  as  an  inducement.  In  Diagram  V  on 
page  243,  this  increase  in  saving  would  be  shown  by 
moving  the  point  of  intersection  of  the  cost  curve 
and  the  abstinence  curve  further  to  the  right.  It 
might  conceivably  move  it  as  far  to  the  right  as  the 
point  B\  where  the  cost  curve  intersects  the  produc- 
tivity curve.  .In  that  case  there  would  be  no  such 
thing  as  interest,  though  there  would  still  be  the  fact 
that  men  appreciate  the  present  more  highly  than 
the  future.  However,  all  this  is  mere  speculation, 
for  such  a  condition  of  affairs  is  not  likely  to  occur. 
The  risk  of  losing  even  one's  principal  is  a  power- 
ful discourager  of  saving.  However  much  men  may 
prefer  present  to  future  gratifications  when  both  are 
relatively  certain,  there  can  be  no  doubt  that  they 
still  more  prefer  present  certain  gratifications  to 
future  unbertain  ones.  And  it  is  a  difficult  matter 
to  determine  how  much  of  the  sacrifice  of  saving  is 
due  to  this  uncertainty.  Economic  writers  generally 
have  excluded  the  payment  for  risk  from  interest, 
though  some  have  distinguished  net  from  gross  inter- 
est by  defining  the  latter  as  including  payment  for 
risk  and  the  former  as  excluding  it.  But  they  usu- 
ally have  in  mind  only  the  more  concrete  and  meas- 
urable forms  of  risk,  such  as  those  resulting  from 


256  The  Distribution  of  Wealth 

fire  and  flood  and  fluctuations  in  the  market,  leav- 
ing out  of  account  such  non-measurable  forms  as 
the  chance  that  the  saver  may  not  live  to  enjoy  his 
savings,  or  that  if  he  does  he  may  be  so  well  off 
financially  in  the  future  that  his  savings  would  not 
then  be  needed  so  much  as  in  the  present.  It  does 
not  seem  possible  to  eliminate  risks  of  the  latter 
type  from  the  normal  sacrifice  of  saving,  and  there- 
fore, in  so  far  as  they  discourage  the  accumulation  of 
capital,  they  may  be  said  to  add  to  the  rate  of  interest. 
But  the  more  concrete  and  calculable  forms  of  risk, 
such  as  were  mentioned  above,  are  discouragers  of 
enterprise  rather  than  of  saving,  and  are  therefore  a 
source  of  profits,  as  will  be  seen  in  the  following 
chapter. 

If  the  foregoing  argument  is  correct,  it  would  seem 
that  the  productivity  and  the  sacrifice  theories  of  inter- 
est are  to  be  harmonized  in  much  the  same  manner 
as  the  cost  and  utility  theories  of  value.  This  balanc- 
ing of  opposing  forces  which  has  been  developed  by 
recent  writers  in  their  discussions  of  value  seems 
capable  of  a  much  wider  application  than  it  has  yet 
received.  This  chapter  is  an  attempt  to  apply  it  to 
the  theory  of  interest,  as  the  last  two  chapters  have 
been  to  apply  it  to  the  theories  of  wages  and  rent. 

The  question  as  to  whether  or  not  one  man  ought 
to  be  allowed  by  law  to  receive  interest  from  another 


Interest  257 

resolves  itself,  as  most  other  political  questions,  into 
the  simple  question  of  expediency.  Without  con- 
sidering the  question  from  the  standpoint  of  abstract 
ethics,  the  argument  from  expediency  is  sufficient  to 
justify  interest.  Were  it  possible  to  prohibit  it,  there 
would  be  at  least  two  unfortunate  results.  First,  much 
of  the  capital  would  be  under  inferior  management. 
The  reason  A  hires  capital  of  B  is  because  he  can 
make  better  use  of  it  than  B  can.  He  can  make 
it  produce  more.  If  therefore  B  were  forbidden 
to  receive  payment  for  the  use  of  his  capital,  either 
society  would  lose  through  his  inferior  management 
or  he  would  consume  it.  This  brings  us  to  the 
second  unfortunate  result.  It  would  decrease  the 
amount  of  saving.  Capital  to  assist  in  carrying  on 
industry  would  become  scarcer,  and  society  would 
suffer  from  a  diminished  supply  of  goods  with  a  cor- 
responding advance  in  cost.  Again,  if  the  owner  of 
capital  can  secure  an  income  from  its  use,  there  does 
not  seem  to  be  any  good  reason  why  he  should  not 
receive  a  like  advantage  if  he  is  asked  to  lend  it. 

Whether  the  owner  of  capital  should  be  allowed  to 
derive  an  income  from  its  use  is  a  slightly  more 
difficult  problem,  but  it  also  must  be  determined  on 
grounds  of  social  expediency.  Aside  from  the  fact 
that  any  attempt  to  prevent  it  would  be  abortive, 
there  is  the  further  fact  that  even  if  such  an  attempt 


V. 


ISS  The  Distribution  of  Wealth 

could  succeed,  it  would  promptly  check  the  tendency 
to  save.  The  supply  of  capital  would  then  be 
limited  to  that  amount  which  men  would  be  willing  to 
save  without  any  inducement  in  the  way  of  a  future 
surplus  to  compensate  for  the  present  disadvantage 
of  saving  or  waiting.  Referring  again  to  Diagrams 
V  and  VI,  pages  243  and  246,  the  supply  of  capital 
would  be  represented  by  the  line  AK  if  the  owners 
of  capital  were  not  allowed  to  derive  any  interest 
from  it.  Even  those  who  object  to  the  interest  on 
capital  will  not  pay  for  a  piece  of  capital  all  that  it 
will  earn  in  its  lifetime,  and  not  to  pay  that  much  is 
to  receive  interest  on  it.  Paying  less  for  it  than  its 
total  earnings  during  its  lifetime,  and  then  waiting  for 
those  total  earnings  to  mature,  puts  them  in  possession 
of  a  surplus,  and  this  is  taking  interest  as  truly  as 
when  one  man  lends  money  to  another  for  a  stipu- 
lated rate  of  interest.  The  income  of  the  wealthy 
capitalist  who  owns  factories  or  railroads  is  of  the 
same  sort  and  derived  from  the  same  source,  though 
on  a  larger  scale,  provided,  of  course,  he  has  not 
secured  a  monopoly  or  otherwise  swindled  the  public. 

COLLATERAL  READING 

E.  Bohm-Bawerk,  Positive  Theory  of  Capital,  Books  V-VII. 
Alfred  Marshall,  Principles  of  Economics,  Book  VI,  Chap- 
ter VI. 
J.  B.  Clark,  The  Distribution  of  Wealth,  Chapter  XIII. 


CHAPTER  VII 
PROFITS 

Though  broadly   defined   as   the  income  of   the       . 
business  man  who  receives  neither  stipulated  wages,      j 
rent,  nor  interest,  the  meaning  of  the  term  "  profits  "     / 
has  been  narrowed  down  by  the  enlargement  of  the 
definitions  of  the  three  other  shares.    If  wages  are  the 
earnings  of  all  labor,  they  must,  of  course,  include 
the  earnings  of  the  independent  worker,  whether  he 
runs  a  small  shop  where  he  works  alone,  or  a  large 
establishment  where  hundreds  are  working  for  stipu- 
lated wages  under  him.      Similarly,  if  rent  is  the 
earnings   of   land,  it  must  include   the   earnings   of 
the  business  man's  own  land,  and  for  the  same  rea- 
son interest  must  include  the  earnings  of  his  own 
capital. 

It  will  at  once  be  objected  that  this  process  will 
ehminate  profits  altogether  by  including  all  incomes 
under  the  other  three  heads.  But  this  would  not  be 
quite  true  for  several  reasons.  In  the  first  place, 
the  actual  amounts  which  the  business  man  pays  for 
the   hire   of    these   agents   of    production   are  only 

259 


260  The  Distribution  of  Wealth 

approximately  equal  to  their  marginal  products,  and 

the  closeness  of  that  approximation  varies.     He  will 

not  knowingly  pay  more  than  that,  because  to  do  so 

would  involve  a  loss.     Of  course  the  owners  of  the 

factors  of  production  will  not  knowingly  take  less 

than  their  marginal   products,  because  that  is  what 

\  they  are  really  worth,  and  that  is  what  they  can  get 

-  if  they  are  persistent  and  skilful  in  bargaining.     But 

it  is  never  known  precisely  what  their  marginal  prod- 

\ucts  are  at  any  given  time.     Under  stable  conditions 

of  industry,  experience  would   determine  that  point 

/with  a  fair  degree  of  precision,  and  employers  would 

}  bid  against  one  another  for  any  factor  which  could 

,be    had    for   less   than   its  marginal    product  until 

they  would  bring  up   its   price.     In  any  case   the 

approximation  is  brought  about  by  the  process  known 

as  the  higgling  of  the  market,  and   this  continual 

higgling   would,  under   stable   conditions,  keep   the 

I  price  of  the  use  of  any  factor  very  near  the  amount 

\of  its  mcirg'.nal  product. 

But  conditions  in  the  modern  industrial  world  are 
never  quite  stable,  and  under  unstable  conditions 
it  is  much  more  difficult  to  tell  in  advance  what  the 
marginal  product  of  any  factor  will  be.  In  general 
the  business  man  is  more  careful  to  avoid  losing  that 
which  he  already  has  than  to  gain  something  in 
addition.      Consequently  he  will  be  pretty  sure   to 


Profits  261 

keep  on  the  safe  side  when  making  an  offer  to  the 
laborer,  the  landlord,  or  the  capitalist.  Moreover,  he 
is  in  a  better  position  to  know  what  their  factors  are 
approximately  worth  than  the  other  men  are.  The 
result  is  that  the  factors  of  production  are  more  fre- 
quently employed  at  a  price  slightly  under  than 
slightly  *  over  their  marginal  productivity.  Those 
business  men  who  make  the  mistake  of  paying  the 
latter  price,  will  either  correct  it  as  soon  as  they  find 
it  out,  or  they  will  be  eliminated  from  business  by 
their  failure,  while  those  who  pay  the  former  price 
will  be  more  likely  to  survive.  This  means  that  the 
business  men  as  a  class,  by  reason  of  their  superior 
advantages  in  bargaining,  receive  a  share  in  addition 
to  their  net  wages,  rent,  and  interest. 

The  share  which  results  from  the  business  man's\ 
superior    bargaining    power   cannot    be   called    the   \ 
product  of  the  business  man,  for  superior  bargaining    j 
produces  nothing.      It  adds  nothing  to  the  amount 
which  the  community  can  produce,  but  only  affects 
the  distribution  of  the  product.     It  is  a  purely  acquisi- 
tive function,  and  is  therefore  a  factor  in  distribution, 
but  not   properly  a  productive  factor.      In  the  last 
analysis,  the   profits  of   the  superior   bargaining   of., 
business  men,  as  a  class,  come  out  of  the  wages,  rent,   |. 
or  interest,  of  the  labor,  land,  or  capital  which  they 
hire.     What  one  business  man  gains  off  another  adds  ' 


262  The  Distribution  of  Wealth 

nothing  to  the  general  share  of  profits ;  but  in  so  far 
as  he  out-bargains  the  laborer,  the  landlord,  or  the 
capitalist,  he  does  add  something  to  the  general 
share  of  the  business  men's  profits  by  taking  some- 
thing from  the  shares  of  the  other  factors. 

Care  should  be  taken  to  distinguish  this  from  the\ 
share  which  the  business  man  earns  by  the  superior  1 
organization  and   management  of  the  factors  which  1 
he  employs.     If  he  can  take  charge  of  a  group  of  " 
factors  which  would   otherwise  be  able   to   produce 
$100,000  worth  of  product,  and  so  manage  them  that 
the  whole  combination  can  produce  ;^  11 0,000  worth, 
by  the  law  of  marginal  productivity,  that  extra  $10,000 
worth  is  his  product.     That  is  the  amount  which  the  • 
community  is  able  to  produce  with  his  help  over  and 
above  what  it  could  produce  without  his  help,  and 
this  is  the  only  sense  in  which  any  factor  can  be  said 
to  be  productive.     But  this  share  belongs  properly 
under  the  head  of  wages  rather  than  profits.     It  is 
due  to  the  labor  of  the  business  man,  and  that  labor 
is  productive  in  the  same  sense  that  the  labor  of  any- 
one else  is  productive.     His  labor  is  largely  mental, 
it  is  true,  but  so  also  is  that  of  his  accountant.     As  a 
matter  of  fact,  all  labor  is  more  or   less  mental   in 
character.     That  is  to  say,  all  labor  combines  both 
mental   and   physical   exertion,   the  only   difference 
being  that  in  some  forms  the  mental  element  is  rela- 


Profits  263 

tively  more  important,  and  in  others  relatively  less 
important.  Moreover,  the  amount  which  the  business 
man  can  earn  in  this  way  is  determined  in  precisely 
the  same  manner,  and  by  the  same  law,  as  the  earn- 
ings of  any  other  laborer. 

The  law  of  marginal  productivity  can  be  applied 
to  the  earnings  of  business  management  as  well  as 
to  the  wages  of  other  labor.  The  amount  which  \ 
any  individual  business  man  can  get  by  means  of 
his  superior  management  (not  through  his  superior 
bargaining  capacity)  depends  upon  the  amount 
which  he  can  add  to  the  product  of  the  community 
over  and  above  the  amount  which  it  could  produce 
without  his  help.  That  determines  how  much  his 
help  is  wanted.  But  this  amount  decreasesr  as  the 
number  of  business  managers  increases,  and  in- 
creases as  the  number  decreases,  in  proportion  to  the 
other  factors.  As  was  pointed  out  in  Chapter  II, 
a  law  of  diminishing  returns  applies  to  the  product 
of  a  given  amount  of  the  other  factors  when  man- 
aged by  increasing  numbers  of  managers.  That 
is  to  say,  the  product  cannot  be  doubled,  trebled, 
and  quadrupled  by  merely  doubling,  trebling,  and 
quadrupling  the  number  of  business  managers. 
This  means  that  each  additional  manager  can  add 
less  and  less  to  the  total  product  as  the  number  of  |\, 
managers  increases  more  and  more. 


264  The  Distribution  of  Wealth 

Even  the  work  of  devising  and  initiating  im- 
provements when  performed  by  the  business  man 
himself  instead  of  his  employees,  comes  under  the 
general  description  of  labor,  and  its  reward  under 
the  general  law  of  wages.  If  the  improvement  is 
made  by  an  inventor  who  does  not  himself  own 
the  establishment  in  which  it  is  to  be  used,  his 
reward  is  clearly  wages  rather  than  profits,  whether 
he  be  working  for  stipulated  wages,  or  working  inde- 
pendently and  selling  his  inventions.  This  being 
the  case,  there  is  no  good  reason  why  a  reward 
earned  in  a  similar  way  by  the  business  man  him- 
self should  not  be  called  wages.  If  the  inventor  be 
working  for  stipulated  wages  in  a  large  manufac- 
turing establishment,  he  may  be  said  to  be  the  pro- 
ducer of  the  amount  which  his  invention  adds  to 
the  product  of  the  estabHshment.  Making  allow- 
ance for  the  risk  of  the  owner,  and  the  discount- 
ing of  the  future,  his  real  earnings  are  equal  to 
that  amount ;  and  if  his  employer  pays  him  such  a 
sum,  there  will  be  no  employer's  profits.  In  so  far 
as  the  employer  discounts  that  product  because  of  its 
distance  in  the  future,  paying  the  inventor  only  the 
present  worth  of  that  future  product,  he  will  then 
realize  the  current  rate  of  interest  on  his  invest- 
ment,—  that  is,  on  the  wages  he  pays  the  inventor. 
The  same  would  be  true  in  case  the  inventor  works 


Profits  265 

independently  and  sells  his  invention  to  the  business 
man.  If  the  latter  pays  the  present  worth  of  the 
future  product  of  the  invention,  he  makes  no  profits 
but  only  interest  on  his  investment.  But  if  he  suc- 
ceeds in  out-bargaining  the  inventor  in  either  case, 
paying  him  less  than  the  present  worth  of  the  future 
product  of  the  invention,  or  if  the  uncertainty  of 
success  induces  the  inventor  to  part  with  his  inven- 
tion for  a  small  sum,  then  and  only  then  will  the 
business  man  secure  profits.  \  Profits  are  in  this 
case  also  the  result  either  of  superior  bargaining  or 
of  the  uncertainties  attending  the  introduction  of 
an  improvement. 

In  the  case  of  a  franchise  or  other  special  privi- 
lege granted  by  the  public  to  a  business  man  or 
corporation,  there  may  or  may  not  be  profits  accord- 
ing to  the  terms  upon  which  the  privilege  is  acquired. 
If  the  public  charges  what  the  privilege  is  worth,  — 
that  is,  if  it  gets  fair  terms  out  of  the  business  man 
or  corporation, — the  latter  may  earn  interest  on  the 
investment  and  wages  of  superintendence,  but  no 
profits  out  of  the  franchise  itself.  This  would  not, 
of  course,  preclude  the  possibility  of  profits  from 
other  sources,  —  for  example,  from  the  out-bargaining 
of  laborers  or  lenders  of  capital.  But  if  the  business 
man  or  corporation  succeeds  in  out-bargaining  the 
public,  and  thus  acquiring  the  privilege  for  less  than 


266  The  Distribution  of  Wealth 

it  is  worth,  it  may  secure  a  surplus  in  the  way  of 
profits  over  and  above  what  may  be  secured  by  the 
ordinary  business  man. 

A  catalogue  of  the  special  methods  by  which  busi- 
ness men  of  certain  low  grades  of  morals  succeed 
in  out-bargaining  the  consumer  and  thus  secur- 
ing profits  for  themselves,  would  make  an  interest- 
ing study.  It  is  only  necessary  to  mention  such 
businesses  as  the  manufacture  of  patent  medicines 
and  similar  articles,  the  adulteration  of  food  products, 
and  the  manufacture  of  shoddy  goods  of  various 
kinds  —  to  say  nothing  of  lobbying  for  tariff  duties  — 
to  indicate  what  a  fruitful  field  these  methods  fur- 
nish to  those  whose  moral  standards  will  permit' 
them  to  enter  it. 

On  a  slightly  higher  plane,  but  still  a  distinctly 
low  one,  is  a  method  which  has  been  growing  in 
importance  in  recent  years.     This  may  be  called  the^ 
method  of  terrorism,  and  it  consists  in  the   forma-  \ 
tion  of  an  organization  among  the  producers  of   a  I 
certain   commodity   for   the   purpose   of   controlling/ 
the  business.     Such  organizations   uniformly  adopt 
various  underhanded    and  unscrupulous  methods  of 
driving  competitors  out.     In  short,  they  attempt  to 
terrorize   the  business  by  making   it   unsafe   for   a 
competitor  to  enter.      Ordinarily  a  competitor  will 
not  enter  an  unsafe  business   until  the  profits  be- 


Profits  267 

come  high  enough  to  tempt  him  to  face  the  danger 
of  loss.  By  thus  making  competitors  reluctant  to 
enter  tlie  field,  the  organization  is  able  to  maintain 
a  level  of  profits  determined  by  the  degree  of  risk, 
which  it  is  able  to  inflict  upon  its  competitors.  That 
is,  the  more  effectively  the  organization  can  terrorize 
the  trade,  and  the  greater  the  artificial  risks  it  can 
create,  the  less  competition  it  will  have  and  the 
larger  profits  it  can  make.  This  is  the  method 
uniformly  adopted  by  trusts,  and  is,  in  spite  of  the 
claims  put  forth  by  their  advocates,  the  chief  purpose 
of  their  organization. 

These  methods  are  all  alike  in  the  one  particular    -^ 
that    they   are    attempts    to    secure    advantages   in  f 
bargaining  which  will  enable  their   beneficiaries   to 
secure  a  share  in  distribution  over  and  above  what       ." 
could  naturally  be  earned.     They  deserve  a  place  in^^^ji^ 
a  discussion   of   the   problem   of  distribution   solely         ^ 
because  they  are  recognized  methods  of  doing  busi- 
ness, and  are  not  yet  sufficiently  condemned  by  the 
moral  sense  of  the  community  to  place  them  in  the 
same  category  with  those  of  the  thief,  the  counter- 
feiter,  and   the   confidence   man.     These   men   also 
secure  shares  in  distribution  by  the  exercise  of  their 
mental  faculties,  but  these  shares,  like  those  of  the 
aforementioned  classes,  represent  no  service  rendered. 
However,  the   latter   class   of   occupations   are    not 


268  The  Distribution  of  Wealth 

recognized  as  legitimate  lines  of  business,  and  their 
shares  are  therefore  not  usually  considered  in  a 
treatise  on  distribution. 

But  aside  from  the  artificial  hazards  created  by  the 
trusts  and  similar  organizations,  there  are  certain 
natural  risks  in  business  which  are  due  to  the  machi- 
nations of  no  one  in  particular.  There  are  certain 
gains  as  well  as  losses  in  business  which  are  due  to 
circumstances  over  which  no  individual  or  definable 
group  of  individuals  exercises  any  control.  Unpre- 
ventable  changes  are  constantly  occurring  in  the 
market  to  affect  the  prices  of  various  commodities, 
and  it  is  the  independent  business  man  who  gains 
most  or  loses  most  by  these  changes.  The  labor, 
land,  and  capital  which  he  employs  will  usually  have 
been  contracted  for  in  advance  ^t  stipulated  rates, 
and  these  rates  do  not  adjust  themselves  at  once  to 
the  changed  conditions.  During  the  interval,  the 
employer  is  either  gaining  or  losing  by  the  change  in 
the  market. 

It  might  be  expected*  that  the  losses  would  offset 
the  gains  if  the  business  man  had  absolutely  no 
means  of  foretelling  the  future.  But  one  of  the 
functions  of  the  business  man  is  to  prognosticate,  as 
best  he  can,  the  probable  conditions  of  the  market; 
and  there  are  signs  and  indications  which  aid  him  in 
this  task.     Probably  no  one  can  tell  accurately  what 


Profits  269 

the  conditions  of  any  market  will  be  a  year,  a 
month,  or  even  a  week  hence ;  but  capable  business 
men  can,  on  the  average,  and  in  the  long  run,  come 
nearer  telling  than  the  incapable  ones,  and  still 
nearer  than  those  who  **  go  it  bHnd,"  paying  no 
attention  whatever  to  signs  and  indications.  It  is 
like  guessing  at  the  weather.  No  one  can  tell  posi- 
tively, even  one  hour  in  advance,  what  the  weather 
will  be,  but  a  capable  farmer  or  sailor  recognizes 
certain  signs  and  indications  which  assist  him  in 
guessing,  and  the  result  is  that  fewer  are  caught  in 
storms  than  would  be  if  they  had  to  guess  blindly, 
without  any  indications  whatever  to  guide  them. 
Even  the  business  man's  limited  ability  to  prognosti- 
cate the  conditions  of  the  market  will  make  the  losses 
in  the  long  run  appreciably  less  than  the  gains, 
because  business  men  will  guess  right  more  often 
than  wrong. 

The  incomes  which  business  men  secure  through 
their  ability  to  adjust  themselves  to  changes  in  the 
market,  though  not  technically  produced,  are  yet  in 
a  sense  earned.  By  putting  their  capital  at  hazard 
and  agreeing  to  pay  stipulated  wages,  rent,  and 
interest  for  the  factors  which  they  hire,  they  relieve 
the  owners  of  these  factors  from  a  certain  amount  of 
risk.  Even  these  men  may  lose  through  the  failure 
of  a  business  man,  but  not,  under  the  law,  until  he 


270  The  Distribution  of  Wealth 

has  lost  all  his  own  capital.  Their  risk  is  therefore 
reduced  by  having  his  capital  placed  in  the  position 
of  greatest  hazard,  —  that  is,  in  the  position  where 
losses  strike  it  first  and  never  reach  the  other  factors 
until  it  has  all  been  wiped  out.  In  so  far  as  these 
other  factors  are  made  somewhat  safer  by  this  pro- 
cess they  can  well  afford  to  receive  something  less  on 
the  average  than  they  might  otherwise  receive,  leav- 
ing the  business  man  something  of  a  surplus  in  the 
long  run  to  compensate  him  for  his  greater  risk. 

This  part  of  the  business  man's  profits  is  analogous 
to  the  profits  of  an  insurance  company,  which  are, 
of    course,   different   from   the   premiums   received. 
The  real  reward  of  the  insurer,  whether  he   be_an  j 
ordinary  business  man  or  a  chartered  insurance  com-  j 
pany,  is   to  be  found   in  the  excess  of   gains  over/ 
losses.     In  the  case  of  the  insurance  company  it  is 
the  total  premiums  received  for  assuming   the   risk 
minus  the  loses  consequent  upon  assuming  the  risk. 
Here  the  question  arises :  How  does  there  happen  to 
be  a  difference .?     Why  will  the  patrons  of  an  insur- 
ance company  pay  it  more  than  their  total  losses,  thus 
leaving  the  company  a   profit.?      Evidently  because 
the  risk  to  the  insurer  is  less  than  to  the  insured^' 
In  the  case  of  fire  insurance,  for  example,  the  loss 
to  the  insurer  in  case  of  fire  would  include  only  the 
money  value  of  the  buildings  and  goods  destroyed ; 


Profits 


271 


but  in  the  case  of  the  insured  it  would  also  include 
shrunken  credit  and  crippled  business.  Having 
capital  of  his  own,  his  credit  is  good  for  a  certain 
amount  in  addition,  but  a  part,  at  least,  of  that  credit 
vanishes  with  his  capital.  More  important  still  is 
the  effect  of  a  large  and  sudden  loss  as  compared 
with  small  annual  payments  upon  his  consumption. 
These  annual  sums  are  paid,  as  it  were,  out  of  the 
y 


\B 


^HvO 


A  F 


GB 


last  and  least  necessary  part  of  his  income.  In  order 
to  make  these  payments,  he  gives  up  only  the  enjoy- 
ment of  those  things  which  he  can  best  get  along 
without.  But  a  large  and  sudden  loss  may  deprive 
him  of  even  the  necessaries  for  a  time.  This  can  be 
illustrated  by  means  of  the  above  diagram. 

Let  the  income  of  a  certain   man   be   measured 
along  the   line  OX^  and   the    utility  to  him  of    the 


272  The  Distribution  of  Wealth 

various  parts  of  that  income  along  the  line  OY. 
That  is  to  say,  if  his  income  were  represented  by  the 
line  OFy  its  marginal  utility  would  be  represented 
by  the  line  EF;  but  being  represented  by  the  Hne 
OBy  its  marginal  utility  is  represented  by  the  line 
CB.  Now  let  us  suppose  that  his  business  is  so 
hazardous  that  he  suffers  a  loss  of  ;^iooo  by  fire 
once  every  eleven  years  on  the  average.  He  could 
well  afford  to  pay  an  annual  premium  of  ;^ioo  for 
the  sake  of  being  insured.  A  hundred  dollars  paid 
in  any  one  year  would  cost  him  in  the  way  of  sacri- 
fice an  amount  of  utility  represented  by  such  a 
parallelogram  as  HCGB.  In  eleven  years  he  would 
have  paid  ;Jiioo,  which  would  make  a  total  sacrifice 
represented  by  the  parallelogram  DCAB.  But  the 
loss  of  $1000  in  any  one  year  would  involve 
a  sacrifice  represented  by  the  irregular  surface 
ECFB.  Since  this  surface  is  larger  than  the 
parallelogram  DCAB^  he  would  lose  less  in  the 
way  of  real  utility  by  paying  $1100  in  eleven  years 
than  by  losing   ;^iooo  in  any  one  year. 

In  the  case  of  ordinary  insurance,  the  shifting  of 
the  risk  from  the  insured  to  the  insurer  does   not 
diminish  the   number  of   losses   to  be  borne,  but  it^ 
diminishes  the  amount  of  risk  because  the  loss  can/ 
be  more  easily  borne  by  those  upon   whom   it  is 
shifted ;  it  bears  less  heavily  upon  the  insurer  than 


Profits  273 

it  would  upon  the  insured.  It  is  for  this  reason  that 
the  insured  can  afford  to  pay  in  premiums  more  than 
enough  to  enable  the  insurer  to  meet  the  losses. 
This  familiar  principle  of  insurance  explains  how  it 
happens  that  there  are  profits  in  the  insurance  busi- 
ness. 

It  is  evident  that  in  the  case  of  the  business  man, 
as  was  shown  to  be  true  in  the  case  of  the  insurance 
company,  so  much  of  his  gross  income  as  is  neces- 
sary to  cover  his  real  risk,  or  to  make  good  his 
losses,  is  not  to  be  classed  as  profits.  Only  that 
which  he  wins  because  of  favorable  changes  in  the 
market,  over  and  above  what  he  loses  because  of 
unfavorable  changes,  can  be  so  classed.  How  does 
there  happen  to  be  a  surplus  in  this  case }  It  must 
be,  as  in  the  former  case,  because  the  risk  to  him 
is  less  than  it  would  be  to  those  whom  he  relieves  of 
it.  As  compared  with  the  laborers,  it  is  probable 
that  a  given  loss  would  affect  him  less  seriously  than 
it  would  them.  The  loss  of  any  considerable  part  of 
their  wages,  which  would  frequently  happen  if  they 
bore  their  own  risk,  or  took  their  own  chances  with 
the  market  for  their  products,  would  mean  serious 
deprivation.  But  there  is  no  reason  for  believing 
that  a  given  loss  would  on  the  average  affect  the 
business  man  less  seriously  than  it  would  the  land- 
lord and  the  capitalist  of  whom  he  hires  his  land  and 


274  The  Distribution  of  Wealth 

capital.  They  are  usually  in  as  good  a  position  to 
bear  a  loss  as  he  is.  But  there  are  reasons  for 
believing  that  the  skilful  business  man  will  experi^ 
ence  fewer  losses  than  would  be  experienced  by 
those  whom  he  relieves  of  risk,  whether  they  be 
laborers,  landlords,  or  capitaHsts.  This  is  due  to  no 
actuarial  principle,  as  in  the  case  of  the  insurance 
company,  but  to  the  business  man's  superior  fore-^ 
sight  and  skill  in  avoiding  losses.  That  is  a  part  of 
his  special  function,  and  in  the  performance  of  it  he 
can  be  assumed  to  develop  special  skill.  This  part 
of  his  income  is,  therefore,  due  to  the  fact  that  he  is 
able  to  avoid  losses  more  effectively  than  the  others 
whom  he  relieves  of  their  risks.  Even  if  he  pays 
them  what  they  might  be  expected  to  earn  on  the 
average  and  in  the  long  run,  —  counting  the  losses 
with  the  gains  resulting  from  fluctuations  of  the 
market  and  other  fortuitous  circumstances,  —  by  so 
managing  the  business  that  the  losses  are  reduced 
and  the  gains  increased,  the  business  man  will  find 
himself  in  the  possession  of  a  surplus  without  having 
robbed  or  out-bargained  any  one.  This  means  that 
this  part  of  hig, surplus  is  due  to  the  fact  that  he  is^ 
able  to  reduce  the  risk  which  he  assumes  below  that' 
which  the  others  would  have  had  to  carry  if  he  had 
not  reHeved  them. 

But  even  if    the  business  man  is   not    able    to 


\ 


Profits  275 

avoid  losses  more  successfully  than  the  others 
whom  he  relieves  of  risk,  he  may  still  secure  an 
income  through  his  function  as  a  risk-taker.  The 
owner  of  any  factor  of  production  will  ordinarily 
accept  as  hire  something  less  than  its  average 
marginal  product,  on  condition  that  he  be  relieved 
of  risk.  The  loss  of  a  given  sum  out  of  one's  cus- 
tomary income  is  a  matter  of  more  concern  than 
the  gain  of  an  equal  sum  in  addition  to  one's  cus- 
tomary income.  Almost  any  one  would  therefore 
accept  an  assured  income  in  preference  to  an 
uncertain  one,  even  though  the  chances  were  that 
the  uncertain  one  would  average,  in  the  long  run, 
something  more  than  the  assured  one.  Assured 
wages,  interest,  or  rent,  for  example,  of  j^iooo  a 
year,  would  be  accepted  by  the  average  man  in 
preference  to  the  uncertain  earnings  of  business, 
even  though  these  uncertain  earnings  might  be 
expected  in  the  long  run  to  average  as  high  as 
l^iioo  a  year.  By  taking  advantage  of  this  ten- 
dency in  bargaining  for  labor,  land,  and  capital,  the 
business  man  will  therefore  find  himself  in  the 
possession  of  a  surplus,  provided  he  does  not 
fail  through  sudden  losses  before  he  has  had  time 
to  profit  by  the  average  of  the  "long  run." 

Let  us  suppose  that  a  given  fund  of  labor,  land, 
and   capital   can,  on   the   average   and  in  the  long 


276  The  Distribution  of  Wealth 

run,  produce  ^100,000  a  year.  That  is  the  amount 
which  they  would  receive  if  they  worked  together  on 
the  cooperative  plan  instead  of  hiring  themselves 
to  some  employer.  But  owing  to  fluctuations 
of  the  market  and  other  fortuitous  circumstances, 
this  product  varies  from  year  to  year,  some  years 
rising  as  high  as  ^150,000,  and  again  falling  as 
low  as  ;^5o,ooo.  Rather  than  take  their  chances 
with  these  ups  and  downs,  the  laborers,  landlords, 
and  capitalists  will  ordinarily  be  willing  to  accept 
a  stipulated  income  of  something  less  than  ;?  100,000 
—  say  ^95,000  —  provided  any  one  is  able  to  make 
them  such  an  offer  with  a  good  prospect  of  being 
able  to  carry  out  his  contract.  In  that  case,  the 
employer  will,  in  the  long  run,  have  an  income 
of  1^5000  a  year  in  addition  to  the  earnings  of  his 
own  labor  of  management,  or  of  his  own  land 
and  capital. 

If  in  addition  he  is  able  to  develop  special  skill 
in  prognosticating  the  conditions  of  the  market 
so  as  to  slightly  reduce  the  losses,  thereby  increas- 
ing the  annual  product  to  jj  10 1,000  a  year,  he  will 
have  an  average  income  of  ^6000.  Then  if  he 
also  succeeds  in  out-bargaining  some  of  those 
from  whom  he  hires  the  factors  of  production,  he 
will  find  his  income  still  further  increased.  In 
addition  to  all   these   methods   he   may,  as   already 


Profits  277 

pointed  out,  so  organize  and  manage  the  factors 
as  to  make  them  turn  out  a  larger  product  than 
they  otherwise  would,  in'  which  case  he  will  secure  'Oj 

earns  in   this  way  really  belongs   under   the  wages  )0^^ 


a   still   larger  income.     But  the   amount  which   helfi^^ 


of  superintendence  rather  than  under  profits.  It  "^^^ 
is  earned  by  the  productive  labor  of  the  business 
man,  and  by  a  kind  of  labor  which  can  be,  and 
frequently  is,  hired  at  a  stipulated  salary.  When 
it  is  so  hired,  its  earnings  clearly  belong  under 
wages  rather  than  profits,  and  there  is  no  good 
reason  for  placing  it  under  a  different  head  when 
it  happens  to  be  earned  by  the  business  man  him- 
self. But  the  function  of  risk-taking  cannot  be 
turned  over  to  an  employee  working  for  a  salary. 
It  is  essentially  the  function  of  the  business  man 
himself,  and  he  cannot  shift  it  to  any  one  but 
another  independent  business  man  or  business  con- 
cern, and  even  then  in  only  a  few  special  cases, 
like  fire  insurance.  The  business  man  is  essen- 
tially an  enterpriser,  or  an  entrepreneur,  as  he  is 
sometimes  technically  called.^  Both  terms  signify 
one  who  undertakes  or  assumes  risks.  It  is  the 
reward  of  this  special  function  which,  together 
with   the  results  of   superior  bargaining,  constitutes 

1  Cf.  The  article  by  F.  B.  Hawley,  on  "  Enterprise  and  Profit,"  in 
the  Quarterly  Journal  0/  Economics,  l:!loy^mh&x,  1900. 


278  The  Distribution  of  Wealth 

the  peculiar  income  of  the  business  man,  such  an 
income  as  is  never  earned  by  any  one  except  a 
business  man  who  undertakes  risks. 

That  part  of  the  business  man's  income  which  is 
due  to  his  ability  to  reduce  his  risk  by  his  superior 
skill  in  guessing  at  the  probable  conditions  of  the 
market  is  very  closely  akin  to  his  wages  of  super- 
intendence, and  might  almost  as  well  be  placed 
under  that  head  as  under  profits.  But  inasmuch  as 
it  is  so  closely  related  to  the  function  of  risk-taking, 
it  seems  better,  on  the  whole,  to  include  it  under  the 
latter  head.  It  is  the  peculiar  reward  of  the  specu- 
lator—  in  the  better  meaning  of  that  term  —  whose 
special  skill,  if  he  has  any,  consists  in  knowing 
better  than  others  when  to  buy  and  when  to  sell. 
Every  business  man  is  a  speculator  in  the  sense  of 
being  compelled  to  buy  in  advance  upon  an  uncer- 
tain market,  and  he  is  the  one  who  profits  or  loses 
by  such  transactions.  In  so  far  as  this  is  a  neces- 
sary part  of  every  business,  the  income  secured  by 
special  skill  in  this  direction  must  be  regarded  as 
earned. 

Speculation  in  the  purely  commercial  sense,  which 
consists  simply  in  buying  things  when  they  are 
believed  to  be  cheap  and  holding  them  for  a  rise 
without  any  industrial  purpose  whatever,  is  not  a 
wholly  barren  function,  though  there  are  few  com- 


Profits  279 

munities  in  which  it  is  not  overdone.  Wherever  it 
is  necessary  that  goods  should  be  produced  a  long 
time  in  advance  of  their  consumption,  it  is  also 
necessary  that  some  one  should  hold  them  during 
the  interval.  This  consists  not  only  in  housing  or 
storing  them,  but  also  in  waiting  to  get  one's  value 
out  of  them ;  and  waiting,  as  we  saw  in  the  chapter 
on  Interest,  is  burdensome  when  carried  too  far. 
The  producer  must  wait  a  long  time  for  his  reward, 
or  the  consumer  must  buy  a  long  time  in  advance 
of  his  needs,  unless  some  one  else  will  come  for- 
ward and  relieve  them  both  of  the  necessity  of 
waiting.  The  reward  for  waiting  is  interest,  but 
in  addition  to  waiting  there  is  the  risk  of  losing. 
It  is  as  necessary  that  some  one  should  risk  his 
capital  as  it  is  that  some  one  should  wait.  But 
no  one  is  likely  to  do  this  unless  he  is  tempted  by 
the  hope  of  a  profit.  Whoever  does  it  under  such 
an  inducement  is  to  that  extent  a  speculator.  To 
be  sure,  he  may  be  several  other  things  besides: 
he  may  be  a  storer  of  goods,  as  in  the  case  of  the 
owner  of  a  warehouse,  and  a  distributer  of  goods, 
as  in  the  case  of  a  merchant ;  but  in  so  far  as  he 
is  merely  a  buyer  of  goods  when  they  are  cheap 
and  a  seller  when  they  are  high,  he  is  a  speculator. 
Let  us  suppose,  as  an  extreme  illustration,  that 
no   one  were  willing   to   hold   any  part  of  a  wheat 


28o  The  Distribution  of  Wealth 

crop  from  the  time  of  its  harvesting  until  such  times 
as  it  was  most  needed.  The  whole  crop  would  then 
have  to  be  used  up  at  once,  and  in  order  to  be  so 
used,  it  would  have  to  be  put  to  very  inferior  pur- 
poses, or  used  in  the  satisfaction  of  very  inferior 
wants.  Consequently  its  utility,  or  want-satisfying 
power,  would  be  very  low.  During  the  remainder 
of  the  year  there  would  be  a  scarcity  of  wheat,  and 
many  important  wants  would  have  to  go  unsatisfied. 
By  holding  a  part  of  the  crop  till  it  is  needed  more 
than  it  is  immediately  after  harvest,  its  utility  would 
be  greatly  increased  and  the  well-being  of  the 
community  enhanced.  Whoever  does  this  holding, 
whether  it  be  the  farmers  themselves,  the  millers,  or 
a  special  class  of  speculators,  is  serving  the  com- 
munity by  increasing  the  want-satisfying  power  of 
some  of  the  goods  in  its  possession.  Whatever  in 
the  way  of  profits  is  secured  by  this  process  may  be 
regarded  as  payment  for  this  service. 

But  a  great  deal  that  goes  on  under  the  name  of 
speculation  does  not  deserve  that  name,  in  spite  of 
its  opprobrious  sound.  Gambling  is  a  better  name 
for  those  transactions  which  pretend  to  be  buying 
and  selling,  but  consist  really  in  betting  on  the 
course  of  the  market.  It  is  quite  as  easy  for  a 
couple  of  men,  either  in  or  out  of  the  stock  market 
or  the  board   of    trade,  to   bet  on  the  state  of  the 


Profits  281 

market  at  some  future  time  as  it  would  be  to  bet  on 
the  state  of  the  weather;  and  one  kind  of  betting 
would  serve  about  as  important  an  economic  pur- 
pose as  another,  even  though  the  one  was  done 
under  the  form  of  buying  and  selling  without  any 
real  transfer  of  goods.  However,  so  long  as  it  is  im- 
possible to  distinguish  for  legal  purposes  between 
legitimate  speculation  and  gambling  under  the  form 
of  buying  and  selling  products,  it  is  generally  con- 
sidered best  to  allow  them  both  to  go  on  together, 
since  the  one  serves  an  important  economic  purpose 
and  the  other  affects  only  the  parties  who  partici- 
pate, and  does  no  one  else  any  harm. 

It  should  be  observed  that  there  are  no  profits  of 
gamblers  as  a  class,  for  what  one  makes  another  . 
loses.  But  in  the  business  of  real  buying  and  sell-  \^ 
ing,  there  is  a  margin  of  difference,  on  the  average 
and  in  the  long  run,  in  favor  of  those  who  buy  at 
opportune  times  —  say  just  after  a  wheat  harvest  — 
and  sell  when  the  article  is  more  wanted  than  it  was 
when  it  was  bought.  This  margin  is  due  to  the 
fact  that  the  speculator  relieves  the  other  classes  of 
the  disadvantages  and  uncertainties  of  waiting,  en- 
abling them  to  realize  a  certain  price  at  once,  which 
they  will  generally  prefer  to  an  uncertain  price  in 
the  future,  even  when  the  chances  are  that  the  fu- 
ture price  will  be  slightly  higher  than  the  present 


282  The  Distribution  of  Wealth 

one.     The  speculator  furnishes  a  kind  of  insurance 
by  reHeving  others  of  a  share  of  their  risk. 

It  is  not  to  be  inferred,  however,  that  all  risk  is 
burdensome.  The  gambling  instinct  is  so  strong 
in  some  people  that  they  will  eagerly  hazard  their 
wealth  on  chances  which  they  know  to  be  against 
them  purely  for  the  excitement  of  the  hazard.  Dif- 
ferent individuals  differ  greatly  in  this  particular,  but 
in  general  it  will  be  found  that  small  sums  will  be 
risked  on  the  chance  of  winning  large  ones  more 
readily  than  large  ones  will  be  risked  on  the  chance 
of  winning  small  ones,  even  when  the  chances  in 
the  latter  case  are  more  than  proportionally  superior. 
So  great  is  the  preference  for  the  former  class  of 
hazards  that  a  great  many  men  —  one  might  almost 
say  the  majority  of  men  —  will  risk  JfJi  on  the  chance 
of  winning  $1000,  even  when  it  is  well  known  that 
there  are  2000  chances  to  one  against  their  winning. 
That  is  why  lotteries  flourish  where  they  are  not 
suppressed  by  law.  But  very  few  will  risk  $1000 
on  the  chance  of  winning  ;?i,  even  if  they  knew 
that  there  are  2000  chances  to  one  in  favor  of  their 
winning.  If  a  company  should  offer  to  sell  1000 
tickets  at  j^iooo  each,  out  of  a  lot  of  2000,  only  one 
of  which  was  a  blank,  all  the  rest  drawing  prizes  of 
;^iooi  each,  it  would  be  making  a  better  offer  than 
any  lottery  ever  has  made,  or  ever  could  make ;  but 


Profits  283 

it  would  not  be  able  to  induce  1000  individuals  to 
buy  tickets.  And  yet  such  a  company  would  be 
offering  a  good  risk,  as  risks  go,  and  any  one  who 
would  continue  buying  such  risks  would  gain  in  the 
long  run,  though  he  might  lose  all  his  money  on  the 
first  venture. 

Outside  of  mining  and  a  few  extra  hazardous 
enterprises,  industrial  and  commercial  risks  belong  K 
in  the  class  where  relatively  large  sums  must  be 
hazarded  on  the  chance  of  small  gains.  Such  risks 
do  not  appeal  to  the  gambling  instinct,  and  conse- 
quently they  do  not  attract  men  except  where  the 
chances  are  good  in  the  long  run,  —  that  is,  where 
the  gains  on  the  whole  considerably  exceed  the 
losses.  Those  who  embark  on  such  enterprises  will, 
in  the  long  run,  receive  profits.  But  in  such  extra 
hazardous  enterprises  as  appeal  to  the  gambling 
instinct,  by  the  chance  of  large  gains  from  small 
investments,  men  are  so  overanxious  to  invest  that 
the  losses  on  the  whole  exceed  the  gains,  and  there 
are  no  profits  for  such  men  as  a  class,  though  of 
course  a  few  win  large  prizes.  It  is  in  the  former 
class  of  enterprises  that  the  "irksomeness  of  risk" 
deters  men  from  embarking,  reduces  competition, 
and  improves  the  chances  of  those  who  have  the 
foresight  or  the  hardihood  to  enter. 

There  is  a  certain  parallelism   between   the  risk^ 


284  The  Distribution  of  Wealth 

^eory  of  profits  and  the  abstinence  theory  of  interest. 
In  the  chapter  on  Interest  it  was  seen  that  the 
necjessity  of  waiting  for  the  product  of  a  piece  of 
capital  tended  to  reduce  its  present  value  somewhat 
below  the  sum  total  of  its  future  earnings.  The  one 
who  buys  it  at  its  present  value  and  waits  for  its 
earnings  to  mature  will,  for  this  reason,  secure  a 
surplus  in  the  form  of  interest.  In  a  similar  way, 
the  risk  connected  with  carrying  on  any  enterprise 
under  unstable  conditions  may  reduce  the  present 
value  of  the  equipment,  including  the  labor  employed, 
somewhat  below  the  probable  value  of  its  product, 
even  after  allowance  is  made  for  interest.  Those 
who  undertake  such  enterprises  may  be  expected,  in 
the  long  run,  to  secure  a  surplus  in  the  form  of 
profits. 

But  we  saw  in  our  discussion  of  the  interest  prob- 
lem that  not  all  waiting  is  equally  burdensome,  some 
waiting  being  done  without  any  hope  or  expectation 
of  reward  in  the  form  of  interest.  Similarly,  not  all 
risk  is  equally  burdensome,  some  risks  being  under- 
taken for  the  sake  of  the  excitement  of  the  hazard. 
In  the  case  of  an  enterprise  which  appeals  to  the 
gambling  instinct,  the  eagerness  of  men  to  buy  the 
risk  will  give  it  a  value  somewhat  greater  than  it  is 
'  worth,  so  that  they  who  persist  in  buying  such  risks 
invariably  lose  in  the  long  run,  though  they  may  win 


Profits  a85 

on  some  of  their  early  ventures.  But  in  the  case  of 
an  enterprise  which  does  not  appeal  to  the  gambling 
instinct,  men  are  so  reluctant  to  buy  the  risk  that  its 
market  value  is  usually  less  than  its  real  worth,  and 
men  who  persist  in  buying  such  risks  inevitably  gain 
if  they  continue  long  enough  and  are  not  ruined  by 
early  losses.  In  the  former  class  of  enterprises  there 
are  no  profits,  but  losses  instead,  for  the  adventurers 
as  a  class.  In  the  latter  class  of  enterprises  there 
are  profits  for  the  adventurers  as  a  class. 

In  view  of  all  that  has  been  said,  we  may  conclude 
that  profits  include  only  what  is  left  after  the  other 
shares   are   paid.     This  does   not  mean  that  profits) 
are  a  residual  share  in  the  sense  that  the  others  are^ 
determined  independently  by  laws  which  affect  them_ 
each  alone,  leaving  profits  as  a  share  which  can  be^ 
determined   by  no   law  except   that   of   subtraction. 
There  is  no  such  thing  as  a  residual  share  in  that 
sense,  for  any  change  which  affects  one  share  will 
affect  them  all  in   one  way   or  another.     They   all 
mutually  help  to  determine  one  another.     But  iji_a_ 
very  concrete  sense   the  profits  of  a  given  business^ 
man  are  what  he  has  left  after  paying  all  his  expenses 
and   allowing   himself    wages    for    his  own    labor ; 
such  wages  as  he  could  command  in  the  market  if  he 
were  to  offer  to  work   for  some   one  else,   besides 
interest  on   his   own   capital   and   rent  on   his  own 


286  The  Distribution  of  Wealth 

land ;  such  interest  and  rent  as  these  factors  would 
bring  on  the  market. 

This  surplus  is,  like  the  other  shares,  the  immediate 
result  of  bargaining,  but  in  this  case  there  are  several 
sets  of  circumstances  which  enable  the  business  man 


^) 


to  bargain  JO  as  to  have  a  surplus,,  left  after  paying 
for  the  other  factors  of  production.     The  first  is  his 
{\  superior  knowledge  of   the  actual  conditions  of  _the 
market  and  of  the  inside  workings  of  his  business 
which  enables  him  to  tell  better  than  the  members  of 
any  other  class  what  the  marginal  productivity  of  the 
various  factors  really  is  at  any  one  time.     The  second 
is  the  deception  which  is  frequently  practised  in  order 
to  out-bargain  the  consumer ;  the  third  is  the  method 
/\of  terrorism ;  the  fourth  is  the  uncertainty  and  risk 
apormally  attending   an    independent  business  which 
^  makes  the  average  man  wilHng  to  accept  a  stipulated 
sum  as  wages,  rent,  or  interest,  even  when  that  sum 
is  sUghtly  less  than  he  might  be  expected  in  the  long 
A  run  to  earn.     And  finally,  there  is  the  business  man's 
^J  superior  abilit^^  in  guessing  on  the  probable  fluctua- 
tions of  the  market,  which  enables  him  to  reduce  his 
risk  sUghtly  below  that  which  others  less  skilful  in 
this  respect  would  have  to  face. 

Under  stable  conditions  of  industry  some  of  these 
sources  of  the  business  man's  profits  would  tend  to 
disappear.     When  it  can  be  pretty  definitely  deter- 


Profits  287 

mined  what  the  marginal  productivity  of  any  factor 
of  production  really  is,  as  could  be  done  if  industrial 
conditions  should  remain  stable  for  a  considerable 
period,  the  business  man's  advantage  in  bargaining 
would  no  longer  exist.  Moreover,  under  similar  con- 
ditions of  stability  the  risks  of  business  would  either 
disappear  or  be  greatly  diminished.  Whether  the 
other  occasional  sources  of  profits  would  also  tend 
to  disappear  or  not,  would  depend  upon  whether  or 
not  the  community's  intelligence  and  moral  sense 
continued  active  under  stable  conditions.  If  they 
should,  they  would  probably  succeed  ultimately  in 
weeding  out  the  immoral  and  unscrupulous  methods 
of  securing  profits,  a  thing  which  the  very  instability 
of  the  present  period  renders  exceedingly  difficult. 

COLLATERAL  READING 

F.  A.  Walker,  Political  Economy,  Part  IV,  Chapter  IV. 

S.  M.  Macvane,  The  Theory  of  Business  Profits,  Quarterly 
Journal  of  Economics,  Vol.  II,  p.  i. 

J.  B.  Clark,  Insurance  and  Business  Profits,  Quarterly  Journal 
of  Economics,  Vol.  VII,  p.  40. 

F.  B.  Hawley,  Enterprise  and  Profit,  Quarterly  Journal  of  Eco- 
nomics^ Vol.  XV,  p.  75. 

John  Haynes,  Risk  as  an  Economic  Factor,  Quarterly  Journal 
of  Economics,  Vol.  IX,  p.  409. 

H.  C.  Emery,  The  Place  of  the  Speculator  in  the  Theory  of 
Distribution,  Publications  of  the  American  Economic  Associa- 
tion^ 3d  Series,  Vol.  I,  No.  I,  p.  103. 


INDEX 


Abstinence  and  interest,  229  et  seg. 

Bohm-Bawerk,  52  «.,  235, 241, 254, 

258  w. 
Bullock,  C.  J.,  65  ».,  loi  n. 

Cannan,  Edwin,  133  «. 

Capital,     fixed    and     circulating, 

125 «.;     how   measured,    118; 

productive    and    social,     106; 

productivity  of,  216. 
Clark,  J.  B.,  51  «.,  52  «.,  113,  120, 

127,  184  «.,  258,  287  w. 
Commons,  J.  R.,  loi  n. 
Consumers'  goods,  .104. 
Cost,  relation  of  to  value,  26. 

Demand  and  supply,  13. 

Demand,  changes  in,  21-23. 

Diminishing  returns,  53;  applica- 
tion of  law,  63 ;  law  of,  applied 
to  manufacturing,  63,  74;  re- 
versed, 67,  68,  69,  82. 

Diminishing  utility,  15,  16. 

Discounting  the  future,  233. 

Economic  goods  defined,  102. 
Economics,   defined,   xi;     depart- 
ments of,  xii,  xiii. 
Emery,  H.  C,  287  n. 


Fetter,  F.  A.,  113,  127,  133,  212. 
Fisher,  Irving,  130  «.,  133  n. 


Goods,  economic  and  non-eco- 
nomic, distinction  between, 
104;  producers'  and  consum- 
ers', 104-105. 

Haynes,  John,  287  «. 
Hawley,  F.  B.,  277  «.,  287  n. 
Hollander,  J.  H.,  212. 

Insurance  and  profits,  270. 

Interest, abstinence  and,  229  etseq.; 
twofold  nature  of  the  problem, 
215  ;  and  rent,  distinction  be- 
tween, 120  et  seq. 

Jevons,  52  «.,  133,  166. 

Labor,  cost  of,  173;  relation  of  to 
value,  30;  supply  of,  173. 

Land,  "made,"  115;  non-repro- 
ducible properties  of,  112;  pri- 
vate ownership  of,  109. 

Landowner,  functions  of,  203. 

Large-scale  production,  law  of 
economy  of,  91. 

Macvane,  S.  M.,  287  n. 

Malthus,  168-169,  172,  189  «. 

Management,  as  a  factor  of  pro- 
duction, 90. 

Marginal  product,  83. 

Marginal  productivity  of  land, 
190. 


v^ 


289 


290 


Index 


Market,  first  law  of,  5. 

Marshall,  xi,  5,  36  «.,  52  n.,  184  «., 

212,  258. 
Mill,  J.  S.,  133  «.,  201  «. 
Mixter,  C.  W.,  loi  n. 
Monopoly  price,  47. 
Motives,    necessity   of   analyzing. 


Padan,  R.  S.,  201  n. 

Plehn,  C.  C,  113. 

Power  in  exchange,  4. 

Price  defined,  3. 

Producers'  goods,  104. 

Production,  factors  of,  94. 

Profits,  distinguished  from  wages 
of  superintendence,  263;  and 
insurance,  270;  and  wages,  dis- 
tinction between,  131;  defined, 
259- 

Psychical  element  in  economics, 
xiv. 

Rent,  and  interest,  distinction  be- 
tween, 120  g^  seq.;  and  mar- 
ginal product  of  land,  191;  as 
affecting  price,  206;  cause  of, 
189;  differential,  115;  of  pleas- 
ure grounds,  210;  what  deter- 
mines, 199. 

Ricardo,  134,  172,  212. 

Risk,  as  related  to  profits,  280; 
nature  of  industrial,  282. 


Saving,  limits  of,  236. 

Scarcity  and  value,  12. 

Senior,  N.  W.,  loi  n. 

Services,  valuation  of,  xiii. 

Smith,  Adam,  179. 

Speculators'  profits,  278. 

Standard  of  living  and  wages,  170.^ 

Supply   and   demand,  equilibrium 

of,  36;  law  of,  25. 
Supply,  what  determines,  27. 


133  «.,  184  «.,  231  n. 
Terrorism   as  a  source  of  profits, 

266. 
Trusts,  methods  of,  133,  266. 
Tuttle,  C.  A.,  120,  121. 

Utility  and  value,  11. 

Value,  defined,  2;  and  scarcity, 
12;  and  utility,  11 ;  source  of, 
explained,  6,  7,  8,  9. 

Wages,  and  marginal  product  of 
labor,  158;  and  profits,  dis- 
tinction between,  131;  differ- 
ences of,  182;  of  self-employing 
laborers,  135. 

Waiting,  as  related  to  interest,  229. 

Walker,  F.  A.,  193  w.,  287  ». 

Wants,  satiability  of,  13,  14. 

Wealth,  classification  of,  105;  of 
what  constituted,  104. 


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